John Fredriksen-backed SFL Corp is celebrating two decades on the New York Stock Exchange this year, during which time it has rewarded shareholders with $2.7bn in total dividends.

“We have made money every quarter from operations in the past 20 years, which is rather unique in shipping. And we have paid dividends every quarter,” SFL chief executive Ole Hjertaker told TradeWinds at his office at Aker Brygge, Oslo.

Originally called Ship Finance International, the company was a part of Fredriksen’s Frontline and initially provided lease financing solely to Frontline tankers.

Since then, the company has transformed into a diversified shipowner.

The name change to SFL Corp came in 2019 after the leasing company moved into shipowning.

Today, Hjertaker, who joined in 2006 as finance chief, describes SFL as a maritime infrastructure company.

“We have shown that our business model works,” he said.

SFL focuses on owning ships with long-term contracts with strong counterparties.

The company has a fleet of more than 80 vessels in different segments and its contracted revenue is nearly $5bn.

Container ships dominant

Containers contributed 47% of contracted revenue, tankers 18%, car carriers 16%, rigs 13% and dry bulk 5% at the end of the first quarter of this year.

The charter hire consists of 95% period contracts and 5% bareboat deals.

“Bareboat looks nice in an Excel spreadsheet but it does not work in real life,” Hjertaker said.

According to Hjertaker, bareboat charters cause problems because the lessee usually controls the upside in strong markets through options, and the lessor often sits only with the downside in softer markets when the client may not have incentives to maintain and upgrade the vessel.

SFL has clients including AP Moller-Maersk, MSC Mediterranean Shipping Company, Stolt-Nielsen, Trafigura and Volkswagen.

The only related-party client is Fredriksen’s Golden Ocean Group.

“We want to be diversified. We look at all the segments all the time,” Hjertaker said.

This year, SFL has bought three LR2 tankers and two chemical tankers and ordered five large container vessels that have long-term employment.

“We evaluate where the best risk-reward is. Over time the portfolio changes. It is a result of transaction opportunities,” Hjertaker added.

SFL’s funding has also changed over the past 20 years.

From being dependent on Scandinavian bank lending, the financing has also diversified.

“We want to work with many banks in several geographical regions. To be too concentrated to few banks in a single region is a risk in itself,” Hjertaker said.

More of the financing is now done in Asia through bank and lease funding.

Fredriksen’s Hemen Holding owns 20% of SFL, and about 40% of the other shareholders are long-term US institutional investors. About 60,000 retail investors in the US also hold the stock.

“Shipping has been a difficult segment to invest in for financial investors because it is a boom-bust market. In the US, there are relatively few investors who invest in shipping, because of the volatility over time,” Hjertaker said.

SFL’s business model is a way to mitigate the swings of shipping and make it more investable, and investors are attracted by SFL’s stable returns. The company has had an annualised return of 12.9% since it started.

Being a part of Fredriksen’s group of companies gives SFL an edge when finding new deals.

“We are part of a bigger system, and this gives us unique access to deal flow,” Hjertaker said.

Longer-charter focus

SFL focuses on longer contracts while Fredriksen’s other companies typically operate in the spot market and do shorter-term deals.

“The group owns and operates around 350 vessels in multiple segments and is a big customer for the shipyards and suppliers. Shipbrokers and investment banks contact us early if they see an opportunity,” Hjertaker said.

“If we can pick the right transactions and have better access to capital, we can create added value for our shareholders. Our focus is to maximise dividends to our shareholders over time. That is our driving force,” he added.

SFL’s business model is very scalable, according to Hjertaker.

“We can grow more. We can easily double our portfolio. Because we have good access to capital and deal flow,” he said.

“But it is important to do the right deals and be disciplined. Otherwise, you will have problems over time,” he added.

Right now shipping is in a long fundamental up cycle, Hjertaker said.

“World trade is growing, so there is an underlying demand growth for transportation. We have had a period with a low level of newbuilding orders and falling shipyard capacity. And the uncertainty around future fuels has made shipowners more cautious,” he said.

“Many of the segments look very interesting simply because there is a supply squeeze while the demand increases,” he added.

In addition, geopolitical effects, such as the invasion of Ukraine and recent attacks by the Houthis have changed trading patterns and increased tonne-mile demand.

Diversification is a defensive strategy that works through the cycles because over time oversupply usually destroys the market balance in individual shipping segments, Hjertaker said.

“We can move focus from segment to segment. And we continuously focus on renewing the fleet, and everything is for sale at the right price,” he said.