Investment Disciplines

Since the inception of SBM Certificate Company’s predecessor company in 1914, the SBM organization has been in the business of managing the investment portfolios of its face-amount certificate investment companies. Initially these investment portfolios consisted primarily of fixed income securities and mortgage loans. As the financial markets became more sophisticated, the investment company portfolios would later include equity securities and pooled investment vehicles, including mortgage-backed securities.

The management of SBM’s face-amount certificate investment company portfolios, which require investments primarily in high quality and income-producing investments, is the foundation for SBM Financial’s investment disciplines of today. As SBM Financial has expanded its services to include managing investment portfolios for institutional clients and exempt investment companies, the firm has added new investment strategies to its mix, including Core and Opportunistic Real Estate and Private Finance.

Multi-Sector Fixed Income

The investment objective of SBM’s Multi-Sector Fixed Income strategy is to provide current income and an attractive total return. The strategy pursues its investment objective by investing primarily in income-producing securities including investment-grade and non-investment grade corporate bonds, preferred stocks of any market capitalization, real estate investment trusts (“REITs”), convertible preferred income-producing securities (including stocks of any market capitalization and convertible corporate bonds), structured instruments, U.S. Government and agency securities, closed-end investment companies and master limited partnerships.

SBM selects securities for this strategy by analyzing both individual securities and different market sectors. SBM selects the individual securities after performing a risk/reward analysis that includes an evaluation of interest rate risk, credit risk, and the complex legal and technical structure of the security. SBM seeks to enhance performance by allocating relatively more of the allocated portfolio to the sectors that it expects to offer the best prospects for current income and capital appreciation in relation to the risks borne.

High Yield

The investment objective of SBM’s High Yield strategy is primarily to seek high level of current income, and secondarily to achieve capital appreciation. The strategy invests primarily in non-investment grade corporate debt obligations, commonly referred to as “junk bonds.” Under normal market conditions, the strategy invests its allocated assets in high yield corporate debt obligations rated “Ba” or “B” by Moody’s or “BB” or “B” by S&P, and to a lesser extent in fixed income securities rated “Caa” by Moody’s or “CCC” by S&P.

In selecting investments, and to supplement any credit rating analysis supplied by Moody’s and S&P, SBM uses a bottom-up approach, supplemented by a top-down analysis. SBM employs fundamental research and analysis to select individual securities within the targeted industries and market sectors. Fundamental analysis includes the evaluation of a company’s financial condition, quality of management, industry dynamics, earnings growth and profit margins, sales trends, potential for new product development, financial ratios and investment in research and development.

Top-down analysis begins with an overall evaluation of the economic and market environment. Such an analysis helps to anticipate how economic and market events may affect certain industries and specific market sectors within those industries, and thereby companies making up that industry or market sector. The average duration and dollar weighted average maturity of the portfolio securities held under the strategy will vary depending on the analysis of general market and economic conditions.

Equity Growth and Income

The investment objective of SBM’s Growth and Income strategy is to achieve total return on assets through a combination of current income and the disciplined realization of capital gains. Under this strategy, SBM invests primarily in equity securities that historically pay above-average dividends or that it believes are likely to grow their dividend. SBM focuses on total return—the sum of current dividend income and future price appreciation—with the aim of generating superior overall performance.

Under normal circumstances, the strategy may invest in common stocks, preferred stocks, convertible securities and real estate investment trusts (“REITs”) of U.S. and foreign companies that SBM believes have value that is not currently reflected in their market prices. SBM generally diversifies allocated assets to investments over a variety of industries and types of companies. The strategy may also invest in companies of any size. SBM takes a long-term approach to managing assets under this strategy and identifies companies with characteristics that it believes will lead to future dividend and earnings growth or recognition of their true value.

Real Estate Securities

The investment objective of SBM’s Real Estate Securities strategy is to achieve long-term growth of capital and current income. Under this strategy, SBM invests in REITs and other publicly-traded equity securities of U.S. and foreign companies engaged in the real estate industry. REITs pool investors’ funds for investment directly in real estate (“equity REITs”), real estate loans (“mortgage REITs”), or a combination of the two (“hybrid REITs”). This strategy may also invest in other issuers engaged in the real estate business, such as developers, mortgage lenders and servicers, construction companies and building material suppliers.

SBM takes a long-term approach to managing assets under this strategy, and seeks to identify companies whose value is not reflected in their current market price or with characteristics that will lead to above-average earnings growth. SBM analyzes demographic and macroeconomic factors to determine regional allocations. Based on its regional allocations, SBM selects particular investments based on its analysis of valuation relative to underlying real estate values.

Mortgages/MBS

The investment objective of SBM’s Mortgages/MBS strategy is to provide a high level of current income consistent with capital preservation. Under normal market conditions, the strategy will invest in any of the following:

• Mortgage-related U.S. Government securities guaranteed by the Government National Mortgage Association (“GNMA”) or by agencies or instrumentalities of the U.S. Government such as the Federal Home Loan Mortgage Corporation (“FHLMC”) or Federal National Mortgage Corporation (“FNMA”);
• Direct investments in, or investment-grade debt obligations collateralized by assets such as first-lien or home equity loans;
• Direct investments in, or mortgage-related securities or pools secured by loans for commercial properties such as office buildings, multi-family apartment buildings, and shopping centers issued by commercial banks, savings and loan institutions, private mortgage insurance companies and other secondary market issuers; or
• Collateralized mortgage obligations (“CMOs”) issued by U.S. agencies or instrumentalities or in privately issued CMOs that are rated investment grade.

In selecting investments under this strategy, SBM conducts an ongoing evaluation of the economic and market environment. Such an analysis helps to anticipate how economic and market change, like movement in interest rates, inflation, government regulation and demographics, may affect certain industries and specific market sectors within those industries, and thereby the companies making up that industry or market sector. After determining what industries and market sectors to invest in, SBM conducts intensive, fundamental research and analysis to identify attractive individual investments and/or securities within the targeted industries and market sectors.

Core Real Estate

The investment objective of SBM’s Core Real Estate strategy is to seek a high level of current income and to achieve capital appreciation. This strategy focuses on acquisitions of existing real estate properties predominantly in the multi-family and commercial office asset categories with geographic diversity. Under this strategy, SBM seeks to identify investments in quality real property assets that generate a yield preference that meets or exceeds other forms of real estate investing. Investments in real estate are blended in core assets with long-term operating histories in conjunction with event-driven “value enhancing” investments.

SBM’s investment selection process under this strategy begins with extensive market research that serves as the initial identifier of potential geographic areas that meet or exceed standards for investment grade acquisition candidates. Market research includes the use of advanced computerized mapping and detailed demographics studies, and is the baseline for determining sub-markets that have the highest level of economic potential based on income, stability in rents and appreciation potential. As property identification narrows to the sub-market and property level, the pricing review of a prospective acquisition includes an examination of operating statements, including review of “going in” capitalization rate and actual net operating income. Following the pricing review, additional information is reviewed, including location, type of construction, age, area income and the size of investment required. The final aspects of due diligence focus on the actual property, which requires for each prospective investment a review of rent rolls, operating statements and a site visit.

Opportunistic Real Estate

The investment objective of SBM’s Opportunistic Real Estate strategy is primarily to achieve capital appreciation and secondarily to seek a high level of current income. Under this strategy, SBM primarily invests in limited liability investment vehicles such as limited partnerships, limited liability corporations, private REITs and other pooled investment funds whose focus is direct equity investments in real estate development projects. To a lesser extent, this strategy invests directly in development projects and mezzanine loans secured by real estate. Development projects are generally large-scale, and consist of commercial, multi-family, hotel, retail or mixed-use properties.

Under this strategy, SBM will often take an active role as a “partner” in each project, leading or participating in the management of the development process from site identification and acquisition of land, zoning and development planning, creating financial pro forma models for raising investor capital and third-party financing, as well as the full project development program and investment management, in order to realize each individual project.

Private Finance

The investment objective of SBM’s Private Finance strategy is to achieve both a high level of current income and long-term capital appreciation. Under this strategy, SBM provides investment capital, including funding of commercial loans, senior and mezzanine (subordinated) debt, and equity investment capital, to small and middle market privately owned companies or through private investments in public equity (“PIPEs”). Investment returns are derived from interest on loans and fees, as well as long-term growth in the value of invested capital through equity interests.

Under this strategy, SBM targets small and middle market businesses that meet certain criteria, including the potential for significant growth, adequate collateral coverage, experienced management teams, sophisticated outside equity investors and profitable operations.

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