SFL Corporation Ltd. yesterday announced its preliminary financial results for the quarter ended September 30, 2022.
Highlights
• 75th consecutive quarterly dividend declared, $0.23 per share
• Net profit of $49.9 million, or $0.39 per share in the third quarter
• Received charter hire1 of approximately $177.5 million in the quarter from the Company’s vessels and rigs, including $11.3 million of profit share
• Adjusted EBITDA2 of $117.7 million from consolidated subsidiaries, plus an additional $7.9 million adjusted EBITDA2 from associated companies
• Acquisition of two newbuilding feeder container vessels with seven year charters to Maersk and a car carrier with six year charter to a leading car carrier operator
• Delivery of four modern suezmax tankers which immediately commenced six year charters to a subsidiary of Koch Industries, a world leading industrial conglomerate
Ole B. Hjertaker, CEO of SFL Management AS, said in a comment:
«We are pleased to declare our 75th consecutive dividend, demonstrating our unwavering commitment to return value to the shareholders, with more than $2.5 billion paid in dividends so far. Furthermore, our fixedrate charter backlog currently stands at $3.8 billion after adding approximately $1.6 billion the last 12 months, providing us with strong visibility on our long term dividend distribution capacity going forward. Our full-service time charter offering and energy efficiency initiatives across the fleet has given us the opportunity to do multiple repeat transactions with several of our industry leading counterparties. Many of
the recent charters include profit sharing features, and we remain committed to continue to grow and diversify our portfolio».
Quarterly Dividend
The Board of Directors has declared a quarterly cash dividend of $0.23 per share. The dividend will be paid on or around December 30, 2022, to shareholders of record as of December 14, 2022, and the ex-dividend date on the New York Stock Exchange will be December 13, 2022.
Results for the Quarter ended September 30, 2022
The Company reported total U.S. GAAP operating revenues on a consolidated basis of $166.9 million in the third quarter of 2022, compared to $153.3 million in the previous quarter. This figure is lower than the cash received as it excludes approximately $11.7 million of charter hire which is not identified as operating revenues pursuant to U.S. GAAP. This comprises of ‘repayment of investment in sales-type, direct financing leases and leaseback assets’ and revenues from entities classified as ‘investment in associates’ for accounting purposes. The net result was impacted by non-recurring or non-cash items, including positive mark-to-market effects relating to interest rate swaps of $5.5 million, and gains relating to bond and equity investments of $8.6 million in the quarter. There was also a non-cash increase of $0.5 million in credit loss provisions in the quarter.
Reported net income pursuant to U.S. GAAP for the quarter was $49.9 million, or $0.39 per share.
Business Update
As of September 30, 2022, and adjusted for subsequent transactions, the estimated fixed rate charter backlog3 from the Company’s fleet of 78 wholly or partly owned vessels and newbuildings under construction was approximately $3.8 billion with a weighted remaining charter term of 6.8 years. Some of the charters include purchase options which, if exercised, may reduce the fixed rate charter backlog and the average remaining charter term, but will increase capital available for new investments. Additionally, several charters include a profit sharing feature that may improve SFL’s operating results. The vast majority of SFL’s vessels are employed on time charters where the Company is responsible for technical, operational, and commercial management. In addition, some vessels are employed on bareboat charters where the Company’s customers are responsible for these services.
Liners
SFL has a liner fleet of 36 container vessels, including announced transactions, and seven car carriers of which four are under construction. The liner fleet generated approximately $97.9 million in gross charter hire in the quarter. Approximately $10.1 million of the hire was profit share from scrubber fuel savings. As of September 30, 2022, the estimated fixed rate charter backlog3 from the wholly and partly owned liner fleet was approximately $2.5 billion with an average remaining charter term of approximately 4.7 years or 7.4 years if weighted by charter hire. The charter backlog includes approximately $0.5 billion from seven car carriers.
During the quarter, the Company acquired two newbuilding feeder container vessels with seven year charters to Maersk. The first vessel was delivered to SFL in September and the second is expected in November. The charters contain purchase options at the end of year six and seven, including a profit share feature. The transaction increased the fixed rate charter backlog by approximately $120 million. Subsequent to quarter end, SFL acquired a mid-size car carrier with charter until 2028 to a leading car carrier operator. SFL expects to take delivery of the vessel during the fourth quarter. The transaction adds approximately $65 million to SFL’s fixed rate charter backlog, in addition to potential profit share related to scrubber fuel savings.
Tankers
SFL has a fleet of 18 crude oil, product and chemical tankers including announced transactions, with the majority employed on long term charters. The vessels generated approximately $42.4 million in gross charter hire during the quarter. The Company has two Suezmax tankers and two chemical tankers trading in the spot and short term charter market, and these vessels earned net charter hire of $11.5 million in the third quarter, compared to approximately $6.6 million in the second quarter. During the third quarter, the Company announced an agreement to acquire four modern Suezmax tankers in combination with six year time charters to a subsidiary of Koch Industries, a world leading industrial conglomerate, adding approximately $250 million to SFL’s fixed rate charter backlog. Two vessels were delivered to SFL in September, and the last two were delivered subsequent to quarter end.
Dry Bulk
The Company has 15 dry bulk carriers of which nine were employed on long term charters in the quarter. SFL generated approximately $26.5 million in gross charter hire from the dry bulk fleet in the third quarter, including approximately $1.2 million of profit share. The six vessels employed in the spot and short term market earned approximately $10.2 million in net charter hire during the third quarter, compared to approximately $13.4 million from five vessels in the previous quarter.
Offshore
SFL owns two harsh environment drilling rigs, the 2008 built semi-submersible rig Hercules and the 2014 built jack-up rig Linus. During the third quarter, the Company received $10.7 million of charter hire from the rigs. At the end of the third quarter, Linus was redelivered from Seadrill, and is now managed by Odfjell Technology on behalf of SFL. The rig is under a long term contract with ConocoPhillips Skandinavia AS until year end 2028, and the rig works on the greater Ekofisk field, one of the largest oil fields in Norway.
The harsh environment semi-submersible rig Hercules remains on a bareboat charter to Seadrill, currently estimated to end in December 2022. The rig will then be redelivered to SFL in Norway, and thereafter managed by Odfjell Drilling on behalf of SFL. The rig will undergo its scheduled special periodic survey in Q1 2023, and is currently being marketed for new charter opportunities from Q2 2023 onwards.
Financing and Capital Expenditure
As of September 30, 2022, SFL had approximately $179 million of cash and cash equivalents. The Company also had investments in debt and equity securities of $9.3 million and unencumbered vessels for a combined value of approximately $113.5 million at the end of the third quarter. During the third quarter, SFL secured refinancing facilities for its eight capesize vessels and two kamsarmax vessels, for $115 million and $23 million respectively. The transactions freed up approximately $25 million across the ten vessels.
Also during the third quarter, the Company entered into agreements for long term financing of two 14,000 teu container vessels in the Japanese market. The combined amount is $240 million and the first vessel was closed in October, whereas the second one is scheduled for December, 2022. The transaction frees up approximately $120 million compared to the previous secured financing on these two vessels. SFL is in advanced discussions to arrange a $144 million long term facility to part finance four recently acquired suezmax tankers. This facility is expected to close later in the fourth quarter. At the end of the quarter, SFL had four dual fuel car carriers under construction for delivery in 2023 and 2024. The remaining capital expenditures related to yard instalments was approximately $225 million at quarter end. The majority of this is expected to be financed by debt facilities in due course Subsequent to quarter end, the Company agreed to acquire a mid-size car carrier in combination with long term charter to a leading car carrier operator until 2028. Together with the recently acquired 2,500 teu container vessels, these are expected to be financed by a combination of cash at hand and new long term debt facilities.
Strategy and Outlook
We have continued to execute on our long-standing strategy of acquiring attractive assets with long term charters to reputable operators in the shipping and offshore markets, supporting a long term dividend capacity. And over the years, SFL has also sold older, less economical assets, which has improved the overall profile of the fleet.
The diversified and extensive charter portfolio with approximately seven years weighted average charter term provides the Company with good visibility into future cash flows. And many of our charters have been structured with optionality features, which may provide significant further upside for SFL. In addition to the asset portfolio and charters, a key distinguishing feature is SFL’s ability to source attractively priced long term financing. Most of the financing is fixed rate or swapped to fixed via financial hedging instruments, and with the recent rise in interest rate, we now see the benefits of a conservative financing strategy. Similar to our chartering strategy, we have aimed to have significant diversification in our funding base, both in terms of structure and geography, as this will give us more flexibility over time.
We expect to continue building our backlog through new asset acquisitions and investments to further enhance the visibility of our cash flows, supporting our long term dividend distribution capacity.
Accounting Items
Under accounting principles generally accepted in the United States of America (“U.S. GAAP”), long term lease financing arrangements for some of the Company’s container vessels require the Company to report seven of these vessels as ‘Vessels and equipment under finance lease, net’ with the corresponding lease debt reported as ‘finance lease liability’, short and long term.
Additionally, another nine container vessels and one VLCC were reported as ‘Investment in sales-type, direct financing leases and leaseback assets’ in the Company’s consolidated accounts at quarter end.
Under U.S. GAAP, the partly owned affiliates owning four container vessels were accounted for as ‘investment in associates’ applying the equity method. As a result of the accounting treatment, operating revenues, operating expenses and net interest expenses in these affiliates were not included in SFL’s consolidated income statement. Instead, the net contribution from these affiliates were recognized as a combination of ‘Interest income from associates’ and ‘Results in associates’.
In SFL’s consolidated balance sheet, the total investment the Company has in assets held in such equity method investees is a combination of ‘Investment in associates’ and ‘Amount due from related parties – Long term’ as a substantial part of the investments initially undertaken in these associated companies were funded by intercompany loans provided by SFL. In accordance with the Expected Credit Loss model for assets classified as financial assets under U.S. GAAP, a calculation of a credit loss provision is carried out each quarter on SFL’s direct financing lease receivables, amongst other assets, based on historical experience, current conditions and reasonable supportable forecasts, and recorded on the balance sheet with the corresponding change in the provision being recorded on the income statement. At the end of the quarter, the Company and affiliates accounted for as associates, carried a total credit loss provision of $4.1 million.
Source: SFL Corporation Ltd.