SFL Corporation Ltd

NYSE:SFL

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to today's Fourth Quarter 2018 Ship Finance International Limited Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today on February 26, 2019.

I would now like to hand the conference over to your speaker today, Ole Hjertaker.

Please go ahead, sir.

[Ole Hjertaker, CEO]

Thank you and welcome all to Ship Finance International and our Fourth Quarter Conference Call, which also marks our 15-year anniversary of dividend payments. In connection with this, we have also changed our logo as some of you may have noticed. Our ticker on the New York Stock Exchanges is SFL, and going forward, we will most likely use the letters SFL more actively in our marketing to customers, as what we offer to them is a lot more than just ship financing, as we will discuss more about later.

With me here today, I have our CFO, Aksel Olesen; and Senior Vice President, Andre Reppen. Before we begin, our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forward in the forward-looking statements.

Important factors that could cause actual results to differ, include conditions in the shipping, offshore, and credit markets. For further information, please refer to Ship Finance's reports and filings with the Securities and Exchange Commission.

The Board has declared a quarterly dividend of $0.35 per share. This is our 15-year anniversary of profits and dividends, and the dividend represents $1.40 per share on an annualized basis or 11% dividend yield, based on closing price of $12.49 yesterday.

Over the years, we have paid more than $25 per share in dividends or more than $2.1 billion in aggregate and we have a fixed rate charter backlog of $3.8 billion, which should support continued dividend capacity, going forward.

The reported net income for the quarter was approximately $3.5 million or $0.03 per share. This is after an impairment charge of nearly $36 million, relating to five offshore support vessels, mitigated by gains relating to the sale of other offshore assets.

Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries accounted for as investment in associates was approximately $160 million and the EBITDA equivalent cash flow in the quarter was approximately $126 million. Last 12 months, the EBITDA equivalent has been approximately $454 million.

2018 has been an active year with multiple transactions. We have grown our backlog by more than $1.3 billion and seen a major change in the fleet mix. At the same time, we have divested several older uneconomic assets, including several VLCCs from the company's initial fleet in 2004.

In August, we were pleased to announce the acquisition of three modern eco-design containerships built 2015 and with the capacity of 10,600 TEU, in combination with six-year time charters to Maersk Line. The first two vessels were delivered to us in the third quarter and the last vessel in early October, so we have received nearly full cash flow from the vessels in the fourth quarter.

The EBITDA contribution from these vessels is estimated to approximately $35.5 million per year. At the end of the quarter, we acquired two 19,400 TEU container vessels with long-term bareboat charters to MSC, the world's second-largest container line.

The transaction added nearly $470 million to our backlog and we arranged a non-recourse back-to-back long-term lease financing in connection with the transaction, which limited our equity investment to approximately $30 million.

With our large and diverse fleet, we continued our fleet renewal processes, and sold another two older VLCCs in the fourth quarter. We received $51 million in the proceeds from the sales, including a $3.75 million loan note from Frontline as compensation for early lease termination. There was a minor loss of approximately $1.8 million recorded in the quarter, after this sale.

In December, we sold the 2007 built jack-up Soehanah for approximately $84 million. The rig was debt free, and we recorded a book gain of nearly $8 million in connection with the transaction. We also sold some financial investments in Golden Close Maritime Corp Limited, whose only asset was the drillship Deepsea Metro 1.

The rig was sold for $262.5 million in 2018, and we received approximately $45 million from the redemption of bonds and cash dividends on shares we own. A gain of approximately $13 million was recorded in the quarter and Golden Close still has some minor assets, which will be wound down in due course.

Ship Finance owns five offshore support vessels on long-term charters to a non-recourse subsidiary of Solstad Offshore ASA. The market for offshore support vessels remain challenging, and the vessels are currently in lay-up. In December 2018, Solstad announced standstill agreements with multiple lenders, and other stakeholders and commenced discussions to restructure its balance sheet.

While the outcome of this discussion is still pending, we have recorded impairments totaling $35.7 million, which brings the book value in line with charter free broker estimates at year-end. We have also removed these charters from our charter backlog, in order to present a more conservative forecast for our backlog.

As of the end of 2018, the company had a limited corporate guarantee of $30 million on the related bank financing of the affected vessels. The offshore support vessels used to only represents approximately 2% of our charter backlog, and our financial commitments is limited to a corporate guarantee of $30 million on the related bank financing of the vessels.

So, in all - this is a relatively marginal exposure compared to our overall balance sheet. And also, perhaps worth mentioning is that, over the years and we have owned these assets now since 2007 and 2008, we have received approximately $270 million in charter revenues from the vessels on charter to Solstad.

Subsequent to quarter end, we have agreed to extend the charters for six container vessels. Two 5,800 TEU vessels have been extended for five years, at approximately $6,500 per day on bareboat basis, and we have added a purchase obligation at the end, while four for 4,100 TEU vessels have been extended by two years at $4,000 per day.

This has added more than $35 million to our charter backlog and these charters are reflective in the charter backlog that is available for analysts and investors, who would like to see them after contacting the company.

Following the recent acquisitions, our charter backlog now stands at approximately $3.8 billion. The bulk of transactions last year was related to container vessels, so the liner segment now represents more than 50% of our backlog, up from around 25% at year-end 2017. The offshore segment has come down from more than 40% one year ago, to 27% at the end of 2018, while the tanker segment has come down from around 20% to 7%.

Our focus in the liner segment has primarily been on new design container vessels between 9,000 TEU and 19,000 TEU as we see this segment being more attractive for liner companies to take on long-term charters.

We do still see container opportunities in this segment, as illustrated by the recent acquisitions, but we have - do not have any specific guiding or relative allocation between the segments, all deals we do are on a deal-by-deal basis from time-to-time.

In the offshore space, we were very happy to finalize the financial restructuring of Seadrill in early July last year. SFL received full charter hire on the rigs during the restructuring of Seadrill, which enabled us to significantly reduce our financial exposure to the rigs in that period. We have agreed to temporarily reduce charter hire by 30% from 2018 to 2022 with a catch-up thereafter.

In the meantime, we will continue to generate strong net cash flows from these assets, due to significantly reduced leverage and corresponding lower debt service costs. Seadrill has sub-chartered the harsh environment jack-up rig West Linus to ConocoPhillips until the end of 2028. The harsh environment semi-submersible rig West Hercules has recently been awarded multiple consecutive sub-charters in the North Sea and it's now working for Equinor until mid-next year.

Including the West Linus, we have reduced the debt from $1.9 billion initially on these rigs to around $650 million currently. And of this aggregate outstanding loan balance, only $266 million is currently guaranteed by Ship Finance. On the dry bulk side, we have 22 dry bulk vessels in the feet with 14 larger vessels contracted out on long-term basis and seven Handysize vessels and the Supramax bulkers traded in the spot market.

One of our long-term objectives is to combine stability and predictability and cash flows with optionality. As we have seen over time that market volatility can generate super returns from time-to-time. We have a 33% profits based on top of the base rate of $17,600 per day, plus interest adjustment for the vessels on charter to Golden Ocean.

There was a profit share in the third quarter, but not this quarter. But given market volatility, there could be many opportunities for profit share going forward and in the meantime, we do receive our base rate, every single day.

The market strengthened during the first part of the fourth quarter, but has softened lately and it is uncertain if a profit share will accumulate this quarter. The kamsarmaxes and most of the supermaxes on our fleet are all on long-term fixed rate time charters, while the seven Handysized dry bulk carriers continue to trade in the spot market. The rate achieved this quarter for the Handysize vessels were approximately $8,500 per trading day, which was up from approximately $8,000 per day, in the previous quarter.

On the tanker side, in the fourth quarter. The spot market for crude oil tanker saw an increase in rates across all sectors. In particular, the VLCC market produced its strongest quarter in the past two years. The market began to soften toward the end of December and rates reported this far in the first quarter of 2019, are somewhat lower than in the previous quarter.

The remaining VLCC is in our chartered to Frontline Shipping Limited, a non-recourse subsidiaries of Frontline Limited and earned approximately $28,600 on average per day, which is well above the base charter rate of $20,000 per day. So, a profit split of $1.5 million was accumulated in the quarter.

The remaining three vessels are built between 2002 and 2004, and we are debt free at year-end. Only one of these assets were part of the initial fleet acquired from Frontline in 2004, after selling more than 40 older vessels profitably over the years.

In addition to the VLCCs, we also have exposure to the crude oil tanker market through two modern Suezmax tankers which are traded in a pool arrangement with sister vessels owned by Frontline. For these vessels, the average charter rate in the quarter was approximately $17,500 per day, which was up from the $12,500 per day, the previous quarter.

The reported earnings of - the earnings on these vessels were however low, compared to reported rates in the market, due to a new accounting principle, where voyage expenses has changed in 2018 from discharge-to-discharge to a load-to-discharge principle for voyage contracts.

In a rising market, there will be a lag before revenues are booked, and these vessels have both balanced days at the end of the quarter. This is a timing issue only, so we expect to see a relatively high contribution in the first quarter, as a consequence of the trading pattern of the vessels.

But, of course, the fourth quarter was softer than we did anticipate. All the other assets in the segment are on long-term fixed rate charters. Across all segments, in the fourth quarter, 65% of revenues derived from time charter vessels while only 35% derived from bareboat charter vessels and rigs, which may be a surprise to many.

We believe we can offer superior service and flexibility to our customers, giving us access to a more deal flow, than if you focused on one operating mode only, and certainly only if we focus also on long-term time charters and not only financial bareboat charter arrangements.

As this is our 15 year anniversary, we would like to take a step back and look at what has happened during these 15 years. It started with 47 vessels and OBOs trading at the crude oil market, back in 2004. A third of the fleet at the time were single-aisle tankers and all vessels were chartered to Frontline Limited.

We were effectively 100% owned, captive financing - of Frontline and - but over the years, the shares of Ship Finance were distributed by Frontline as dividend and currently we have a diversified shareholder base with more than 70,000 shareholders, according to the latest information.

In 2006, after two years, a separate management team was hired in the company and the company commenced the strategy of diversification. This strategy encompassed asset diversification, counterparty diversification, charter structure diversification and financing risk diversification.

So, we have gone from one single asset class to four asset types, where the tanker space now is our smallest representing 7% of the backlog. We have multiple counterparties and currently have 16 counterparties that we charter our vessels to and more importantly, we have encompassed a chartering structure diversification where we can offer both vessels on time charter and vessels on bareboats.

For vessels on time charter, we benefit from the association with the wider Fredriksen Group where we believe we can offer among the best-in-class cost efficient management of vessels, while at the same time, we can offer bareboat structures for those clients who prefer that kind of arrangements.

In addition, we are focused on financing diversification. When the company was initiated in 2004, it had a $580 million bond loan of $1.1 billion bank loan and the rest was equity. Now, we have a much more diversified structure where we have around $1.5 billion in the bank market, but this represents only 33% of our capital structure. We have roughly the same amount in bond loans, as we had back in 2004, but this is split in multiple bond loans, three Norwegian krone denominated bond loans and two convertible notes in the U.S.

At the same time, we have diversified and have significant funding from the lease market and that represents 25% of our capital structure or around $1.1 billion that we had raised in the lease market, primarily in Asia. We have focused on this diversification, because what we have seen over time is that, not only our shipping markets volatile, but also financing markets are volatile.

By having a wide outreach and focusing on diversification in funding, means that there is less risk for us to be trapped, in case one bank or a certain market should change in character, or there should be issues, not relating to us, but relating to other sides of that business, where they would have to reduce their activity level.

We therefore believe that we are well positioned to continue growing our balance sheet, and over the years, we have sold most of the older vessels and we have really renewed the vessels. So, of the initial fleet, only one vessel remains while we have acquired all the other 85 vessels in the fleet, subsequent to our start, back in 2004.

And with that, I would like to give the word over to our CFO, Aksel Olesen, who will take us through the numbers for the quarter.

[Aksel Olesen, CFO]

Thank you, Ole.

On this Slide, we have shown our pro forma illustration of cash flows for the fourth quarter compared to the third quarter. Please note, that this is only a guideline to assess the company's performance and is not in accordance with U.S. GAAP. Total charter hire for the fourth quarter was $154 million, up from $150 million in the previous quarter.

The main reason for this increase, is the delivery of the third container vessel on charter to Maersk in October, and a full quarter with revenues from this first two vessels. The two 19,400 TEU container vessels acquired at the end of December, will have full earnings effect in the first quarter.

Revenues from our tankers was down due to the sale of two VLCCs, partly offset by the profit share from the Frontline for three remaining VLCCs in the order for $1.5 million and better earnings on the two Suezmax vessels trading in a pool. The marginal reduction in dry bulk was due to lower revenues on the seven smaller Handysize vessels trading in the spot market.

There was no profit share accumulated on the Capesize Bulkers in this quarter. This summarizes to an adjusted EBITDA of $126 million for the quarter or $1.17 per share, up from $120.5 million in the previous quarter.

We then move on to the profit and loss statement as reported under U.S. GAAP. As we have described in previous earnings calls, our accounting statements are different from those of the traditional shipping company. As a strategy - our business strategy focuses on long-term charter contracts. A large part of our activities are classified as capital leasing.

As a result, a significant portion of our charter revenues are excluded from U.S. GAAP operating revenues and instead booked as revenues classified as repayment of investment in finance leases, results in associates and long-term investments, and interest income from associates. So, overall for the quarter, we report total operating revenues, according to U.S. GAAP of $118.6 million up from $111 million in the previous quarter.

This number is lower than the charter hire received for the above mentioned reasons. We recorded a gain of $7.6 million, in connection with the sale of the jack-up rig Soehanah at the end of the year. Mitigated by a loss of $2.6 million in connection with the sale of the VLCCs, Front Ariake and Front Falcon giving us a net gain on sale of assets of $5.8 million.

Following an impairment test of the accounting of the five offshore supply vessels on chartered of Solstad where the assets were written down to charter free broker valuations, the company recorded an impairment of $35.7 million in the fourth quarter.

In December 2018, Solstad announced standstill agreements with multiple lenders and other stakeholders and commenced discussions to restructure its balance sheet. While the outcome of these discussions is pending, we believe it's prudent to take this adjustment now.

As a result, the total operating expenses were $102.4 million, which includes impairments in the Solstad results, resulting in an operating income of $22 million. Furthermore, a gain of approximately $13 million was recorded in connection with the sale of financial investments in Golden Close Marathon Corp, we've shown the drillship Deepsea Metro.

This was classified as an investment in financial securities and the gain is included in other financial items. From 2018, we have had to mark-to-mark or $11 million shares in Frontline every quarter, and in the fourth quarter, we recorded a book loss of approximately $3 million. The share price of Frontline is currently higher than at year-end and as the share price remains above $5.53, you can expect a book gain in the first quarter.

So, overall, and according to U.S. GAAP, the company reported net income of $3.5 million or $0.03 per share. However, excluding the impairments, gains and other non-recurring items, we would have had a net income of $28.2 million or $0.26 per share.

Moving on to the balance sheet. We have sold $212 million of consolidated cash at the end of the quarter, including freely available cash in our subsidiaries, accounted for as investments in associates. The change in investment in marketable securities is related to the sale of securities related to Golden Close maritime mentioned earlier.

As for a change in the amounts due to related parties, we prepaid $30 million of debt related to the Seadrill rigs reducing debt service in 2019. The reduction in other current assets is related to the sale of the shares of the assets of the company of the jack-up Soehanah, with the balance being charter hired, classified as finance lease.

So moving on to the long-term assets. The change on the vessel and equipment is due to refinancing in the form of capital leases of our three 10,600 TEU container vessels and three 14,000 TEU container vessels, whereby the vessels were reclassified to vessel and equipment on the capital leases on the balance sheet.

The corresponding lease liability is including, all the other current liabilities and other long-term liabilities. Increased investments in finance lease is mainly related to two 19,400 TEU vessels acquired at the end of the quarter.

We continue with short-term and current portion of long-term interest bearing debt. The reduction is mainly due to the refinancing, of the bridge financing used to acquire the 10,600 TEU and 14,000 TEU container vessels. The current portion includes scheduled loan amortization and also the NOK900 million floating rate bonds, due in March, which is expected to being repaid with cash from balance sheet. The company currently holds NOK228 million of the bonds.

Looking at the other current liabilities, approximately $68 million of the $136 million, is the current portion of obligations on the capital leases, with the balance of the capital leases being $1.1 billion in other long-term liabilities.

In conjunction with sale of assets maturity of the credit facility, we repaid $85 million outstanding under the Frontline VLCC facility and expect to draw down on the new facility of $50 million in the first quarter.

Stockholders' equity was approximately $1.2 billion, giving a book equity ratio of approximately 30% at the end of the quarter.

Then, looking at the liquidity and financing status. As mentioned, we have total available liquidity of $212 million at the end of the quarter, including cash in our subsidiaries accounted for as investment in associates. In addition, we have available for sale securities of $87 million, which includes investment in senior secured bonds and old securities. The fair value of approximately $26 million at quarter end. In addition to 11 million shares in Frontline with a current market value of approximately $64 million based on the closing share price yesterday.

There are total of 10 debt free vessels at quarter-end, including three VLCCs, two car carriers, two chemical tankers and three 1700 TEU container vessels. The combined charter free value of these assets is approximately $200 million based on average broker appraisals. We may potentially enter into financings on some of these assets in the future, including the three VLCCs where we expect to drawdown on new facility of $50 million in the first quarter.

In the fourth quarter, we concluded refinancing in the term of lease financing for six large container vessels with cash proceeds of $570 million with net liquidity effect of $130 million at very attractive terms. We have also repurchased approximately $28 million of our convertible notes in the open market, which we from time-to-time do, with a gain of $1.5 million recorded in the fourth quarter.

And to summarize, the Board has declared a cash dividend of $0.35 per share for the quarter, representing the sixth consecutive quarter of dividends with more than $2.1 billion distributed to shareholders, since 2004. In 2018, we demonstrated our ability to further grow and renew our business. We currently have one of the vessels left in the fleet and last year we acquired 24 vessels by investing $1.2 billion, adding more than $1.3 billion to the charter backlog.

Furthermore, we have demonstrated our ability to secure attractive financing and they have a very strong liquidity position, giving us a substantial investment capacity to act on growth opportunities in a favorable market environment.

And with that, I give the word back to the operator who will open the line for any questions.

[Operator]

[Operator Instructions] The first question comes from the line of Chris Wetherbee. Please ask your question.

[James Monigan, Citi]

James on for Chris. Wanted to touch on the offshore, wanted to get a sense of your plans to those five vessels. Mike, how are you thinking about possibly divesting them, redeploying them, restructuring them. Just wanted to get a sense for how the standstill might have impacted - how you think about those vessels moving forward?

[Ole Hjertaker, CEO]

Yes, on those vessels, we did agree mid-last year for a reduction in charter rate with a catch-up later. So, we are receiving charter rates on two of those vessels. I think, it's important to note that this - we are taking this impairment now as a precautionary measure. On the basis of communication by Solstad to the market that they are commencing a restructuring of their balance sheet in light of the weak market.

We have therefore taken this - we have definitely taken that impairment now, written them down to the charter free broker values and also removed the charters from our charter backlog. That said those vessels are still on charter to the subsidiaries of Solstad Offshore.

So, we have not, call it taking the vessels back or taking any other action like that. So, it's a precautionary measure for us and it's not on the back of specific, call it, action that's happened with those vessels recently. I would like to add that those five vessels represent less than 2% of our - or before we took them out of the backlog, they represented less than 2% and also our financial exposure is really now limited to the $30 million financing guarantees, we have with the related financings.

So, compared to our overall balance sheet of $4.5 billion, we think this is a relatively marginal situation, but of course, a situation, we will focus on and manage as best as we can and to get - to extract as much value out of this for us and our stakeholders. So, but no, we don't have any specific plans or we don't have any specific plans to take actions where we will terminate those charters, which is what we would have to do to be able to take the vessels and possibly recharter them to someone else.

[James Monigan, Citi]

Do you have the option to terminate the charters or does that actually fit with Solstad?

[Ole Hjertaker, CEO]

Well, there is not an option to terminate. As an owner, you always have - as an owner, if your counterparty is not paying the charter hire, there are mechanics in a charter agreement that you can then take the vessel back and terminate the charter. This is in all our agreements. So, nothing special relating to these vessels. For the time being, as I said they are on charter two Solstad and we are receiving charter hire, as we agreed six months ago.

[James Monigan, Citi]

And then, also wanted to touch on end market concentration. You had - you haven't really - you had said that you weren't going to provide guidance essentially on how that might look. But, on the lower end, how small would you be willing to let particular segment become? Is there a minimum value that you think makes sense or would you let potential end market fall entirely?

[Ole Hjertaker, CEO]

Well, when we make --- when we look at transactions, we don't focus specifically on allocation first for segments as such. It's all deal-by-deal, and we have - we used to have 100% in the tanker space, now we are 7% there. The offshore space used to be almost 60% at some stage a few years back, now it's down to 27%. So, this is a moving mix, it's all down to which transactions we do from time-to-time.

I think one of our benefits of having a multiple segment approach is that we can benchmark deals between the segments. What we have seen over the years is, is that, if you focus on one segment only, you are almost programmed to invest at the peak of a cycle. Because it's when the market is peaking, that's when the equity market typically are wide open for specific - in a specific segment.

And also that's when banks usually are willing to lend the most, both absolute and relative. So, we think having a multiple segment approach, it gives us a better balance on the market, it gives us a way to benchmark between the segments. And if we think that things are going too fast in a segment, we can pull back and focus on another segment.

You know, of course, we have relatively few tankers left. I mean we wouldn't mind owning more tanker vessels if we had the right structure, and if we have the right counterparty with the right type of assets. And there are also segments that we are not in, like LNG for instance, which would be a very normal - natural fit for us. But, it's all about finding the transaction with the right assets, and we prefer modern assets we don't - we would be hesitant to take on older type assets.

To the right counterparty, with the right structure of the deal, where we can also generate a running cash flow that can support our dividend capacity. So, we are monitoring deal flow across the board, consistently here and of course we have ambitions to continue building the charter backlog across the board, and across the segments.

[James Monigan, Citi]

And then one more follow-up on that. Looking at dry bulk, the eight vessels which you have off-chartered. Do you see any indications in the market that those actually might be put on longer term charters in 2019. And if you can't put them on longer term charters in 2019, are those assets that you might consider divesting or monetizing it some way?

[Ole Hjertaker, CEO]

Well, as we say everything - here, everything is for sale. At the right price, you can even get by dogs. No. But joking aside, we always monitor the market and there are - we have looked at - there had been charter opportunities also for those vessels. That said, we - given our size of our fleet and given that we can actually run and operate vessels in the market means that we don't have to fix them out long-term to keep them employed.

So, these vessels were on long-term charters and - they were redelivered from the charters, and we have traded them in the market and our ambition is to continue doing that until we think the market has the right balance and we would fix them out.

So, us not having fixed them, I guess would be an indication that we haven't - we don't think the market has been strong enough for a long enough period to the right counterparty. But, as I said initially, jokingly, I mean everything in our portfolio is for sale at the right price. And, if you offer me a good price, you can get that one and I'm sure you can get other assets too. But, our ambition is to build our portfolio of assets, which hopefully can also support - increasing the charter backlog and support the dividend.

[Operator]

Our next question comes from the line of Randy Giveans. Please ask your question.

[Randy Giveans, Jefferies]

So, a few quick questions from me. Ship Finance, roughly $212 million in liquidity, plus you expect pretty significant free cash in both 2019 and 2020. So, where are some of those expected uses of this cash, any thoughts on share repurchases at this point?

[Ole Hjertaker, CEO]

Well, we did repurchase some convertible notes just before year-end. So, - but, it was on a relatively small scale, it was less than $30 million nominal. We wanted to roll-out to classes, we look at deal opportunities. I would say on a - new deal opportunities, almost on a daily basis and we are capital agnostic.

So, for us, it's all about doing transactions that we think will be accretive to our distribution capacity in the long run. It could be everything from buying a vessel to potentially buying back a share.

So, this is something we focus on all the time, but we don't have any sort of specific target. As Aksel mentioned, we believe we have relatively strong cash position. We have more cash now than we have when we bought the three deepwater drilling rigs, 10-years ago. So, we believe that we could do significant transaction, if the right transaction materializes.

[Randy Giveans, Jefferies]

And then kind of looking at that dividend or distribution, your coverage ratio should remain above at least 1.5 times in both 2019 and 2020, like you mentioned a few times current yield of 11%. I know you don't give specific dividend guidance per se, but if you can just handicap, is the dividend more likely to go up or down in the next year or two years?

[Ole Hjertaker, CEO]

Well, I think from a management perspective, our ambition is of course to build a dividend and increase it over time, but the Board has always been very cautious, and we haven't - and the Board has never promised future dividends.

But, if you look at the history, the dividend has normally been stable or increasing. And when the Board looks at I would say distribution capacity, they don't look at it on a quarter-by-quarter basis, they take a more long-term view when they set the dividend. So, our ambition is to grow it. But no promises.

[Randy Giveans, Jefferies]

And then one quick question from me. Any of the long-term charters interested in scrubbers? I know there were some talk for scrubbers on the Capesizes chartered to Golden Ocean. So, maybe any update for those or other vessels, maybe containerships?

[Ole Hjertaker, CEO]

Yes. We are going to install scrubbers on a number of the vessels that we have in our fleet. We are going to install some scrubbers for our own account, relating to tankers. As you mentioned, Golden Ocean is in the process or has committed to purchase scrubbers on most of the vessels we have in our fleet.

We are discussing with them, whether they should pay for it, or whether we should, call it, finance it effectively for them and we are also in the process of installing scrubbers on a number of the large containerships.

When we look at scrubbers, you call it from our side, when we do it for our own account, it's typically for vessels that are sort of in the spot market or short-term market because that's when you can get the benefit of potential, dislocation and potential for spread expansion, particularly in the early phases of the - with 2020 phase in.

But, when we have vessels on long-term charters, it's always our charterer who pays for the fuel. So, whether we put a scrubber on a chartered vessel is really down to what kind of deal it for us. Does it make sense from a cost of capital perspective? Do we get the returns we need and then we are pretty agnostic on that.

[Randy Giveans, Jefferies]

And then, I guess, with that any CapEx or off hire day guidance for this year and assuming the scrubbers come from Feen Marine?

[Aksel Olesen, CFO]

Well, we have - as you know the Feen Marine as one provider. I think there will be many scrubbers from other providers. So, we are - we have a - we're not locked into one single provider of that. In terms of CapEx, as I said, for a round account we are looking at CapEx of around, I would say around $10 million in aggregate.

And then potentially depending on agreements with our charterers, it could be more, if we get the right return on the capital invested. But from an overall perspective, in terms of our own cash outlay, it's relatively marginal and if we do more it's typically because we get a very nice return on the capital we put in.

[Randy Giveans, Jefferies]

And that would all be in 2019?

[Ole Hjertaker, CEO]

Most of it will be a 2019 and some into 2020.

[Operator]

The next question comes from the line of Gregory Lewis. Please ask your question.

[Gregory Lewis, BTIG]

Ole, could you talk a little bit about the opportunity set, you're seeing in 2019? I mean clearly, 2018 was a strong year for you guys in deploying capital pretty much throughout the year. But, as you look at 2019, could you talk a little bit about the deals you're seeing, are they similar in nature? Have yields moved at all? Or is it kind of 2019 shaping up just a lot like 2018?

[Ole Hjertaker, CEO]

Yes, I think every deal is different. So, it's difficult just to be specific and tell that the general market is changing. I would say that the deals are certainly not becoming worse from a risk-reward perspective in our minds, and also in light of the continued effective reduction in bank portfolios, we also see more, call it, opportunities, what we say on bareboat or call it structured finance related, where many players out there, and I would say sort of Tier II players where Tier I are the listed large entities, who continue to have very good access to bank markets like we do. But, there are many on the notch below that, who don't have that access and who cannot necessarily go up and race up on in the market et cetera.

So, there could be opportunities around that, but also for companies who look at their own cost of capital, because what we, I think we can offer a wide range of products, either from a bareboat structure, which with a purchase obligation in the end, which is really a structured financing, our cost of capital arbitrage, where we can benefit from our superior access to capital than many others.

We can also go to the other end, where we can have a vessel on time charter, where we, through our affiliation with the Fredriksen Group, can source - can manage those vessels more cost efficient than most, we can build vessels, and we have relationships with the shipyards that are much stronger than almost any other shipping company out there, and therefore can potentially source deals and manage deals very efficiently, combining with efficient capital.

So, we're looking at a wide range of products where we are now, at ranging, from either end of the scale. But in the end, it's all down to what's the risk adjusted return for us. Do we think it will be beneficial and support our dividend capacity going forward.

[Gregory Lewis, BTIG]

And then just on your liquidity. I mean, you have the bond due coming later this quarter. After you take away that, I mean you have the Frontline shares, I don't imagine you'd want to sell those at this point, you have the, I guess $200 million of unencumbered vessels. Could you sort of talk a little bit about how you're thinking about overall dry powder at this point, in terms of what type of growth or projects we could see without the addition of new debt at this point?

[Aksel Olesen, CFO]

I think we - as you see, we have a very different sources of capital available. I think we refinanced our NOK from the last fall. So, part of that was to take out - in the upcoming March bond. We might still go to market, as the market develops. So, we'll just have to monitor basically how that market develops. I think - for the time being, I think we are in a good position and it will really depend on the specific project or acquisition on how we finance that.

We have very good access to call it bank - bank capital at attractive costs, so really on a case-to-case basis, a bit difficult to kind of give a general comment on exactly how that's going to look at the end of the day. But, I think we are in a real good position to basically look at end market opportunities and there are a few coming our way.

[Gregory Lewis, BTIG]

And then just one last one from me. As I look at those on encumbered vessels, I mean, you mentioned the two VLCCs. The other vessels that are - should we be thinking about those more in terms of going the bank debt route market or do we think maybe it will be better - more suited to be in the lease market?

[Aksel Olesen, CFO]

I think, if we are going to drill down on new facility for the VLCCS, now in this quarter, that's correct. I think to the extent we're going to leverage of those vessels that will just be with paying [indiscernible] senior financing, if we do that at all. It's also good to just have some free assets providing just cash flow to support the dividend. So, I think that's how we'd like to have it for the time being.

[Operator]

The next question comes from the line of Magnus Fyhr. Please ask your question.

[Magnus Fyhr, Seaport Global]

Just few questions here. First, I mean, you've done a good job in diversifying the company into having a fleet of assets in various segments. Is it - at any point, the liner segment because - is it a risk or is it becoming too big, given that most of the deals have been in that segment or is there any target level that you feel like, you would need to look at other segments from a diversification standpoint?

[Ole Hjertaker, CEO]

Well over time, you know, we have been - as I mentioned, we started with 100% tankers, now it's smaller. We had a very big proportion of offshore at some time, it's smaller now, it's container ships that's relatively larger. So, this goes in waves. Also, when we look at the container ship exposure there are really three of the top liner companies, so it's not all concentrated on one counterparty, it's multiple counterparty, and it's also different in structure.

Some of them are bareboats and more fully structured financing, sort of tuned, while others - we have time charters, where we have more, call it, residual exposure and opportunity toward that. That said, of course, our ambition is to have a diversified portfolio, so we are looking also at transactions in other segments. But again, it's all down to what's the deal - what does the deal look like? Risk reward, individual deals and we're not so focused on specific percentage in any segment.

So, if we think the deal is right, we could do more on the container side, while, of course, our preference everything equal would be to weight it up and some of the other segments, again to have a have a balanced portfolio over time.

[Magnus Fyhr, Seaport Global]

Yes, likely on the slide seven, has that made - I noticed you dropped one slide on the payout ratio and distributed cash flow, was there any reason for that?

[Ole Hjertaker, CEO]

Not really. It was really a slide we didn't use that much. I mean, we give out all the numbers and the only - the thing we really focus on there has always been sort of the debt reduction. So, it's been very sort of stable from quarter-to-quarter. Also, we didn't have a sort of a separate slide on each segment, because we basically provide full breakdown on our fleet and the backlog, through our website. So, instead we focused on slide six where we sort of combined that in that one slide. So, I think it's really more of a refresh of the slide deck than anything.

[Magnus Fyhr, Seaport Global]

And one last question. There's been lot of focus on, I mean the excess liquidity on the balance sheet with I guess 2018 somewhat of a transition year, with expected cash flow to increase in 2019. How much do you, cash you really need on the balance sheet? I mean, you have excess of $200 million now of liquidity, and it doesn't seem like a lot of the recent investments have required much equity capital.

[Ole Hjertaker, CEO]

Well, if you look at our portfolio with the predominant long-term chartered assets, you are very correct. I mean, you really don't need that much cash on the balance sheet, because you really need to have a buffered cash because call it, the timing of when money comes in, may be different for when you pay, say debt installments, et cetera or operating expense on the vessels.

In addition to the $200 million as Aksel pointed out, we have $200 million of unencumbered assets and also a lot of, call it financial investments. So, our capacity if you really, call it, squeeze it, and is more without raising outside capital in our portfolio.

So, I would say you can easily run a portfolio like this with say plus-minus $50 million of debt without any problems and without really testing - testing any limits. We have been running with relatively high cash proportion. I think all the way since we were in the - call it, in the process with Seadrill and we've done a few transactions where we have freed up a lot of cash, selling a couple of offshore assets. So, I think this is more a matter of timing for when capital is being invested more so than necessarily a desire to sit with a very big pool of cash.

[Magnus Fyhr, Seaport Global]

And then just one last. I mean, the yield has come down a little bit here, which is good to see. But you've checked a lot of boxes here, you've diversified your cash flow, and you diversified your capital structure, you got good solid long-term contracts and a strong backlog. What else can you do to make investors more comfortable with the Ship Finance model?

[Ole Hjertaker, CEO]

Yes. Like we said, over time, hopefully, we can demonstrate that we are performing as through the cycles. We have in the presentation, I'll try to also to highlight, how the different products that we can offer to our counterparties. If we look at our charter backlog, we did take that impairment on the offshore assets, they were relatively marginal from an overall portfolio perspective.

But, all the other customers are performing very well and no other issues in the portfolio as we speak, which of course makes us very happy. So, over time, hopefully, because the model proves itself and if we can continue paying a sustainable and hopefully dividends, maybe, we can - maybe more people will believe in us. Who knows.

I mean, we tried - we have to do our best, we have to continue focusing on finding opportunities, minimizing costs and delivering value to shareholders, and over time, hopefully it will reward itself.

[Magnus Fyhr, Seaport Global]

Right. I definitely think a dividend increase will speed up the process. Thank you.

[Operator]

[Operator Instructions] Dear speaker, there are no further questions.

[Ole Hjertaker, CEO]

Okay. Then, I would like to thank everyone for participating in our fourth quarter conference call, and hope that many of you have enjoyed all the dividends, we have distributed over the past 15 years. We are committed to continue building of the company and we believe there will be good investment opportunities for us going forward, with attractive risk-reward profile.

If you have any follow-up questions, there are contact details in the press release, where you can get in touch with us through the contact pages on our web page www.shipfinance.bm. Thank you.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day. Dear speaker, please standby.