OPERATING LEASES

6 Months Ended

Jun. 30, 2023

Leases [Abstract]

OPERATING LEASES

OPERATING LEASES

As of June 30, 2023, we had leased in one vessel from SFL and one vessel from unrelated third party, all of which were classified as operating leases. Additionally, as of June 30, 2023 and December 31, 2022 we had two operating leases for our offices in Oslo and Singapore. All of these leases had an initial duration above 12 months.

In total we have leased in eight vessels from SFL, one of these vessels was classified as operating lease and remaining seven were classified as finance lease as of June 30, 2023. The daily time charter rate for SFL operating lease was $17,600, of which $7,000 is for operating expenses (including drydocking costs) until the third quarter of 2022 when the daily time charter rate was reduced to $14,900 until the expiration of the contracts. In addition, 33% of our aggregate profit from revenues above the daily time charter rate for all eight vessels are calculated and paid on a quarterly basis to SFL. Up to June 30, 2023, the daily hire payments was adjusted if the actual three month LIBOR deviated from a base LIBOR of 0.4% per annum. For each 0.1% point increase/decrease in the interest rate level, the daily charter hire increased or decreased by $50 per day until the third quarter of 2022 and $25 per day in the remaining lease period. This resulted in an average daily rate of $16,041 for SFL operating lease in the first six months of 2023 and we incurred nil in total profit share for all eight SFL vessels in the first six months of 2023 ($1.5 million profit share in the first six months of 2022). With discontinuation of LIBOR as of June 30, 2023,

the reference rate will be changed to SOFR. We are currently in discussions with SFL with regards to the calculation of hire rate adjustment going forward.

Contingent or variable lease expense for the eight SFL leases was recorded in 2023 as interest expense of $1.7 million (six months ended June 30, 2022: $0.9 million). We have a purchase option of $112 million en-bloc for eight vessels after 10 years since inception of the leases in 2015. If such option is not exercised, SFL has the option to extend the charters by three years at a daily time charter rate of $14,900 per day. The lease term for these vessels has been determined to be 13 years and expires in 2028.

For the Ultramax vessel, Golden Hawk, which is chartered in from an unrelated third party, the daily rate was $13,200 up to expiry of fixed term contract in February 2022. In 2021, we extended Golden Hawk lease expiring in February 2022 for approximately one year by using extension option in the contract. The daily rate during the first extension period is $13,700. Further, in second half of 2022, we extended the lease expiring in February 2023 for approximately one year by using the second extension option in the contract. The daily rate during the second extension period is $14,200.

Admiral Schmidt and Vitus Bering are 2019-built 104,550 dwt ice-class vessels, chartered in 2019 on time charter for a firm period of three years, with four annual options exercisable by us to extend the lease. The gross hire is determined based on a weighted average of the Baltic Panamax Index (BPI 4TC) and the Baltic Capesize Index (BCI 5TC) with a floor of $9,000 per day. In February 2022, we exercised the option to extend Admiral Schmidt and Vitus Bering contracts for one year each. Further, in May 2022, we signed a memoranda of agreement with owners of Admiral Schmidt and Vitus Bering, whereby we redelivered the vessels to their owners. We are currently relieved from any duties, obligations liabilities or commitments under the current contracts. In 2022, right of use assets, right of use liabilities and other contract related assets were written off.

For operating leases mentioned above and vessels chartered in on short-term time charters, we have allocated the consideration due under the leases above between the lease and non-lease components based upon the estimated stand-alone price of the services provided by the owner of the vessels. We have presented a total of $14.4 million and $7.5 million of the non-lease component, or service element, under ship operating expenses for the first half of 2023 and 2022, respectively.

Furthermore, we are committed to making rental payments under operating leases for office premises. A lease expense of $0.3 million and $0.3 million is recorded in Administrative expenses in the Consolidated Statement of Operations for the first six months of 2023 and for the first six months of 2022, respectively.

We have recognized right of use assets for our long-term operating leases as follows:

(in thousands of $)	SFL Leases	Golden Hawk lease	Office Leases	Total
Balance as of January 1, 2023	10,361	3,764	1,521	15,646
Additions	—	—	—	—
Amortization	(903)	(1,494)	(261)	(2,658)
Balance as of June 30, 2023	9,458	2,270	1,260	12,988

The amortization of right of use assets relating to leased vessels is presented under charter hire expenses in the statement of operations. The amortization of right of use assets relating to office leases is presented under administrative expenses in the statement of operations.

In the first six months of 2023, we recorded no impairment of right of use assets for operating leases.

We have recognized lease obligations for our operating leases as follows:

(in thousands of $)	SFL Leases	Golden Hawk Lease	Office Leases	Total
Balance as of January 1, 2023	13,355	3,837	1,405	18,597
Additions	—	—	—	—
Repayments	(1,003)	(1,479)	(303)	(2,785)
Foreign exchange translation	—	—	(5)	(5)
Balance as of June 30, 2023	12,352	2,358	1,097	15,807
Current portion	2,080	2,358	462	4,900
Non-current portion	10,272	—	635	10,907

Charter hire and office rent expense

The future minimum rental payments under our non-cancelable operating leases as of June 30, 2023 are as follows:

(in thousands of $)
2023 (remaining six months)	3,274
2024	4,169
2025	3,369
2026	2,809
2027	2,809
2028	1,960
Thereafter	—
Total minimum lease payments	18,390
Less: Imputed interest	(2,583)
Present value of operating lease liabilities	15,807

The future minimum operating lease expense payments are based on the contractual cash outflows under non-cancelable contracts. The charter hire expense recognition is based upon the straight-line basis.

In the six months ended June 30, 2023, the future rental payments include $1.3 million (in the six months ended June 30, 2022: $1.9 million) in relation to office rent costs and $17.0 million (six months ended June 2022: $34.9 million) in relation to charter hire costs for leased in vessels.

Total expense for operating leases, including short term leases, was $27.0 million for the six months ended June 30, 2023 (six months ended June 30, 2022: $26.2 million). Total cash paid in respect of operating leases was $23.3 million in six months ended June 30, 2023 (six months ended June 30, 2022: $25.8 million). The weighted average discount rate in relation to our operating leases was 5.15% and 4.81% for the six months ended June 30, 2023 and June 30, 2022, respectively. The weighted average lease term was 4.3 years and 4.0 years for the period ended June 30, 2023 and June 30, 2022, respectively.

Rental income

As of June 30, 2023, we leased out seven vessels on fixed time charter rates (December 31, 2022: five vessels) and 35 vessels (December 31, 2022: 30 vessels) on index-linked time charter rates to third parties with initial periods ranging between one year and ten years. All of these leases are classified as operating leases. Our revenues from these leases have been included with time charter revenues in the Condensed Consolidated Statement of Operations, which solely relates to leasing revenues.

The future minimum operating lease revenue receipts under our non-cancelable operating leases as of June 30, 2023 are as follows:

(in thousands of $)
2023 (remaining six months)	22,247
2024	38,384
2025	32,083
2026	107
Thereafter	—
Total minimum lease receipts	92,821

An index-linked rate in time charter operating leases usually refers to freight rate indices issued by the Baltic Exchange, such as the Baltic Capesize Index and the Baltic Panamax Index, and, as such, these contracts are essentially operating in the spot market. Index-linked time charter rate operating leases in the table above are included at the minimum rate level of zero.

As of June 30, 2023, the cost and accumulated depreciation of the 42 vessels which were leased out to third parties, were $2,256.0 million and $458.1 million, respectively. As of December 31, 2022, the cost and accumulated depreciation of the 35 vessels which were leased out to third parties, were $1,826.7 million and $404.1 million, respectively.

OPERATING LEASES

OPERATING LEASES

As of June 30, 2023, we had leased in one vessel from SFL and one vessel from unrelated third party, all of which were classified as operating leases. Additionally, as of June 30, 2023 and December 31, 2022 we had two operating leases for our offices in Oslo and Singapore. All of these leases had an initial duration above 12 months.

In total we have leased in eight vessels from SFL, one of these vessels was classified as operating lease and remaining seven were classified as finance lease as of June 30, 2023. The daily time charter rate for SFL operating lease was $17,600, of which $7,000 is for operating expenses (including drydocking costs) until the third quarter of 2022 when the daily time charter rate was reduced to $14,900 until the expiration of the contracts. In addition, 33% of our aggregate profit from revenues above the daily time charter rate for all eight vessels are calculated and paid on a quarterly basis to SFL. Up to June 30, 2023, the daily hire payments was adjusted if the actual three month LIBOR deviated from a base LIBOR of 0.4% per annum. For each 0.1% point increase/decrease in the interest rate level, the daily charter hire increased or decreased by $50 per day until the third quarter of 2022 and $25 per day in the remaining lease period. This resulted in an average daily rate of $16,041 for SFL operating lease in the first six months of 2023 and we incurred nil in total profit share for all eight SFL vessels in the first six months of 2023 ($1.5 million profit share in the first six months of 2022). With discontinuation of LIBOR as of June 30, 2023,

the reference rate will be changed to SOFR. We are currently in discussions with SFL with regards to the calculation of hire rate adjustment going forward.

Contingent or variable lease expense for the eight SFL leases was recorded in 2023 as interest expense of $1.7 million (six months ended June 30, 2022: $0.9 million). We have a purchase option of $112 million en-bloc for eight vessels after 10 years since inception of the leases in 2015. If such option is not exercised, SFL has the option to extend the charters by three years at a daily time charter rate of $14,900 per day. The lease term for these vessels has been determined to be 13 years and expires in 2028.

For the Ultramax vessel, Golden Hawk, which is chartered in from an unrelated third party, the daily rate was $13,200 up to expiry of fixed term contract in February 2022. In 2021, we extended Golden Hawk lease expiring in February 2022 for approximately one year by using extension option in the contract. The daily rate during the first extension period is $13,700. Further, in second half of 2022, we extended the lease expiring in February 2023 for approximately one year by using the second extension option in the contract. The daily rate during the second extension period is $14,200.

Admiral Schmidt and Vitus Bering are 2019-built 104,550 dwt ice-class vessels, chartered in 2019 on time charter for a firm period of three years, with four annual options exercisable by us to extend the lease. The gross hire is determined based on a weighted average of the Baltic Panamax Index (BPI 4TC) and the Baltic Capesize Index (BCI 5TC) with a floor of $9,000 per day. In February 2022, we exercised the option to extend Admiral Schmidt and Vitus Bering contracts for one year each. Further, in May 2022, we signed a memoranda of agreement with owners of Admiral Schmidt and Vitus Bering, whereby we redelivered the vessels to their owners. We are currently relieved from any duties, obligations liabilities or commitments under the current contracts. In 2022, right of use assets, right of use liabilities and other contract related assets were written off.

For operating leases mentioned above and vessels chartered in on short-term time charters, we have allocated the consideration due under the leases above between the lease and non-lease components based upon the estimated stand-alone price of the services provided by the owner of the vessels. We have presented a total of $14.4 million and $7.5 million of the non-lease component, or service element, under ship operating expenses for the first half of 2023 and 2022, respectively.

Furthermore, we are committed to making rental payments under operating leases for office premises. A lease expense of $0.3 million and $0.3 million is recorded in Administrative expenses in the Consolidated Statement of Operations for the first six months of 2023 and for the first six months of 2022, respectively.

We have recognized right of use assets for our long-term operating leases as follows:

(in thousands of $)	SFL Leases	Golden Hawk lease	Office Leases	Total
Balance as of January 1, 2023	10,361	3,764	1,521	15,646
Additions	—	—	—	—
Amortization	(903)	(1,494)	(261)	(2,658)
Balance as of June 30, 2023	9,458	2,270	1,260	12,988

The amortization of right of use assets relating to leased vessels is presented under charter hire expenses in the statement of operations. The amortization of right of use assets relating to office leases is presented under administrative expenses in the statement of operations.

In the first six months of 2023, we recorded no impairment of right of use assets for operating leases.

We have recognized lease obligations for our operating leases as follows:

(in thousands of $)	SFL Leases	Golden Hawk Lease	Office Leases	Total
Balance as of January 1, 2023	13,355	3,837	1,405	18,597
Additions	—	—	—	—
Repayments	(1,003)	(1,479)	(303)	(2,785)
Foreign exchange translation	—	—	(5)	(5)
Balance as of June 30, 2023	12,352	2,358	1,097	15,807
Current portion	2,080	2,358	462	4,900
Non-current portion	10,272	—	635	10,907

Charter hire and office rent expense

The future minimum rental payments under our non-cancelable operating leases as of June 30, 2023 are as follows:

(in thousands of $)
2023 (remaining six months)	3,274
2024	4,169
2025	3,369
2026	2,809
2027	2,809
2028	1,960
Thereafter	—
Total minimum lease payments	18,390
Less: Imputed interest	(2,583)
Present value of operating lease liabilities	15,807

The future minimum operating lease expense payments are based on the contractual cash outflows under non-cancelable contracts. The charter hire expense recognition is based upon the straight-line basis.

In the six months ended June 30, 2023, the future rental payments include $1.3 million (in the six months ended June 30, 2022: $1.9 million) in relation to office rent costs and $17.0 million (six months ended June 2022: $34.9 million) in relation to charter hire costs for leased in vessels.

Total expense for operating leases, including short term leases, was $27.0 million for the six months ended June 30, 2023 (six months ended June 30, 2022: $26.2 million). Total cash paid in respect of operating leases was $23.3 million in six months ended June 30, 2023 (six months ended June 30, 2022: $25.8 million). The weighted average discount rate in relation to our operating leases was 5.15% and 4.81% for the six months ended June 30, 2023 and June 30, 2022, respectively. The weighted average lease term was 4.3 years and 4.0 years for the period ended June 30, 2023 and June 30, 2022, respectively.

Rental income

As of June 30, 2023, we leased out seven vessels on fixed time charter rates (December 31, 2022: five vessels) and 35 vessels (December 31, 2022: 30 vessels) on index-linked time charter rates to third parties with initial periods ranging between one year and ten years. All of these leases are classified as operating leases. Our revenues from these leases have been included with time charter revenues in the Condensed Consolidated Statement of Operations, which solely relates to leasing revenues.

The future minimum operating lease revenue receipts under our non-cancelable operating leases as of June 30, 2023 are as follows:

(in thousands of $)
2023 (remaining six months)	22,247
2024	38,384
2025	32,083
2026	107
Thereafter	—
Total minimum lease receipts	92,821

An index-linked rate in time charter operating leases usually refers to freight rate indices issued by the Baltic Exchange, such as the Baltic Capesize Index and the Baltic Panamax Index, and, as such, these contracts are essentially operating in the spot market. Index-linked time charter rate operating leases in the table above are included at the minimum rate level of zero.

As of June 30, 2023, the cost and accumulated depreciation of the 42 vessels which were leased out to third parties, were $2,256.0 million and $458.1 million, respectively. As of December 31, 2022, the cost and accumulated depreciation of the 35 vessels which were leased out to third parties, were $1,826.7 million and $404.1 million, respectively.