SPEAKER: KEITH MISHKIN, PRESIDENT OF CAMBRIDGE PROPERTIES
SUBJECT: MONTELUCIA RESORT OVERVIEW AND WHERE RESIDENTIAL REAL ESTATE IS GOING THROUGH A DIFFICULT TIME

SPEAKER: VALERIANO ANTONIOLI, MANAGING DIRECTOR OF THE INTERCONTINENTAL MONTELUCIA RESORT AND SPA
SUBJECT: MONTELUCIA RESORT AND SPA (WITH A TOUR)

OVERVIEW ON THE RESORT

There are a total of thirty-four Villas that are here and all of them are part of the resort. They range in size from 3800 to 4700 square feet. From a pricing standpoint they range from the low two millions up to the high four millions. Even with this market we are experiencing, we believe that we set the pace here at Montelucia and, even in the context of this current market, have closed over 70 million dollars worth of real estate in 2008 here at the Villas, so that represents 22 Villas that have closed. While there are a lot of real sour spots within the market, certain market segments are less affected. While sales velocity has slowed over here, we are still getting really wonderful activity especially now that they are complete and of the 34 Villas, 22 have closed, another 4 under contract and we have 8 that are remaining. All our members here at the Villas are part of the Resort. The Resort has a total of 293 rooms, 40 of which are suites and two of those are Presidential or Bridal suites, which are 3000 square feet and are absolutely spectacular. Additionally we are welcoming 27,000 square feet of meeting space that is available for private functions, and a 2400 square foot Wedding Chapel. The Resort opens on November 4 and our first wedding will be on November 8. There is a spectacular spa called the Joya Spa, which is 31,000 square feet, we have a 12,000 square foot signature restaurant named Prado, which is also opening up on November 4.

RESIDENTIAL REAL ESTATE-THROUGH A DIFFICULT TIME-HOW DID WE GET HERE AND HOW SOON DO I THINK IT WILL CHANGE AND WHAT ARE SOME OF THE HIGHLIGHTS AND BRIGHT SPOTS IN OUR MARKET

It is not pretty right now, as we all know. Like the stock market, the Phoenix real estate market is cyclical as well. I would say this is the worst downturn I have seen in my 19 years in real estate. It is very reminiscent of the savings and loan crash from 1989, the tax restructuring of 1984 to 1986, the inflation recession and energy crisis of the 70's. Each of these cycles was then followed by long sustained growth. What makes this downturn particularly painful is the fall from the incredible explosive growth that took place in 2004 and 2005. It was unprecedented the type of growth that took place, and that growth was due to the ease of credit and heavy investor purchasing, which caused both a lack of supply in the market and it made prices sky rocket. So during the period of 1990 to 2003, we saw long sustained growth, and that averages 4% a year. In fact if you go back for many, many years that is typical of what you see in the trend line. During that period of 2004 to 2005, we averaged 20 to 40% per year, depending on the area. Some areas saw even greater increases. That happened for over two years in a row. So some areas saw an 80% increase in the price, and that is not something that could be sustained. So right now in the current downturn, (the numbers I'm giving you are on the overall market) it reflects approximately a 40% decrease from the high, and again that depends on the area.

The first part of the downturn was simply investors selling their supply. So the market was absorbing this product the investors were putting back out, even though the homebuilders were continuing to build at record levels. So as credit tightened, supply quickly out-weighed demand, and shortly after sellers who could not sell or afford to hold on let their homes go into foreclosure. The banks then had these foreclosed homes and originally they held their prices, but eventually many of them gave a mandate to their agents to move their property within 30 - 60 days. Well, how do you move a property in 30 - 60 days-price. As a result, banks slashed their prices to 10 - 30% below what ever the current sales were at that time. So we already saw a little bit of price decompression and then the bank put that in at these low numbers. Of course, they were very successful at in moving their product. Unfortunately that creates a vicious cycle. So this set new comps for the neighborhood which was often times still oversupplied and that caused more foreclosure. Add on top of this, the lack of credit and ease of buyers being able to get in and obtain a loan, and you have a stuck market.

An example of this is what we just experienced in one of our communities. Our company has 12 active communities that we are selling out in the market place. So we have Montelucia, which is the top end of the market and we have a popular price point community in north Phoenix. There are 200 homes there and we are selling very consistently in an average price of $229,000 to $269,000. We have been selling 4 to 6 a month even in the downturn and when things were great, we were selling 10 a month. We are down to our last 25 homes we are selling over there and all of sudden there is a bank foreclosure, for whatever reason there is a bank foreclosure. There were about 4 that came up and the banks kind of held their price and were trying to sell at the same price. Well the consumer is going to go ahead and buy from the builder instead of a bank foreclosure, especially when they are priced similarly. Then one day the bank just suddenly arbitrarily chose to reduce the price to $165,000. So we go and get a buyer all excited and then the go and buy the foreclosure at $165,000--there is too much of a spread. We had 10 contracts in escrow that we were getting ready to close and now there were four bank foreclosures that sold in a day, because of the ridiculously low price. Then they say your homes aren't worth $229,000. Buyers who had put down 5% and were really excited, say I can let my money go and still go buy a foreclosure and still I am way ahead. So that is what has been happening in the market with this vicious cycle. To give you some perspective, we are now selling the remaining homes $179,000 to meet the market. A buyer will always pay more to buy from a builder or a private individual than a foreclosed home because they have other implicit warranties that come with that.

I wish I could say that we are through this mess, unfortunately we are not, but we are not terribly far from the bottom. At times like this, markets tend to overcorrect. Which is what we are seeing right now. However, it won't get any better until lending eases up and consumer confidence comes back. We really need those two things. We are seeing nice traffic in all our communities. Buyers are telling us "I'm ready to go and buy, but I don't want to buy and then find out later that it is lower, so I am just going to kind of sit and wait." I don't think there will be any change between now and the end of the year, but I expect to see, on a personal level, a nice change in season for a lot of reasons. The best months for home selling in the Valley are the summer months. But from a Biltmore perspective, I expect to see us to do quite nicely in season. When I say nicely, everything is relative. I think we will start to see some consumer confidence come back in season. We are still making many sales and in fact, we are on-target to 75,000 new and re-sale homes this year. That is significant. While that is only half of the highs of 2005, it is only 25% off the norm of 100,000 for 2001 and 2002. Supply has also remained steady on MLS at around 53,000 re-sale homes and condos. We've seen a small decline over about an 8-month period, and in the last 2 months we have seen a slight increase. Increases are coming from the foreclosures. The numbers have been varied, because banks are dumping their homes at low prices they have captured somewhere between 30 and just over 40% of the market of the total sales that have been taking place. Foreclosure notices are predicted to peak by year-end, which is also a very positive thing. Once we see that peak, it will take about 6-12 months for that inventory to clear the market. Once that happens, we will see greater absorption. In a very healthy market like 2003, we saw about 30 to 35,000 homes in MLS.

So originally the large homebuilders led the pricing and incentive war, some of the new homes became less expensive for re-sales for the first time in decades. This, along with a decrease in home building production of over 75% from 60,000 new home starts to down to less than 15,000 new home starts led to large decreases in spec inventory. Recently down from over 8,000 specs to about 2500 specs. Once we hit about 800 specs that is when I think the market will be in total equilibrium from a new home perspective. It is happening very rapidly. While they're still negotiating on spec inventory, we are seeing very little negotiation on new construction, which tells me that new homes are at or near the bottom. Homebuilders are not going to start a new home to make no profit, although they will take a loss to sell spec inventory to raise capital.

Banks are selling their foreclosed properties at big discounts and that is what is now battering the re-sale pricing. Nothing more than just the banks doing that. So we are in the middle of a decline that will hopefully hit bottom shortly. Once we hit the bottom, I don't expect any rapid growth, but I do expect a steady decline in inventory. Right now our current oversupply for the Valley is 30,000 homes. It'll probably take through 2010 to eat through the over-supply and start to see the price appreciation. I do expect to see, once we hit this little bottom that I feel we are really close to in my personal opinion, I expect pricing to be flat through 2009 with some modest increases in supply-constrained areas. A sample of a supply-constrained area is Montelucia where you have just 34 Villas and is a specialty product in Paradise Valley.

In our local market of 85016, 85018, 85253, we are seeing a lot of strength compared to other areas. In looking at properties that are selling over $500,000, just to give us some perspective in each of those areas, in 85016, we have 162 active homes in an average price of 1.4 million. Again, these are just homes that are over $500,000. There were 72 homes that closed in the trailing at an average price of 1.2 million. So that tells me that if 72 closed, and 162 active, that is about a two year supply. The right balance should be about a six-month supply. We have a little bit of an over supply there, but we are not seeing a whole lot of price compressing. In most of the cases, like here in Paradise Valley, people are saying, "I am just holding on", which I also think is a very good strategy to do as well. In 85018 there are 243 active with an average price of 1.4 million; 147 closed at an average price of 1 million and that gives us a 1.5-year supply. Then in 85253, there are a513 active at an average price of 3.27 million; 189 have closed at an average price of 2.16 million and that gives us a 2.7-year supply. When I look at our area versus a lot of other areas, the Northeast Valley has seen a 10% year-over-year decline versus 20-40% plus decline in the outlying areas. One of the reasons why is the strong job market we have in our area (Biltmore area). People want to live closer to their work and a lot of the outlying areas have no jobs or very limited jobs out there. So this is why I think this will be a very strong area.

Let me now tell you what I think are some of the highlights and what we can expect to see. While 2009 will remain a tough year; I see a number of highlights.

a) There is a great selection of homes out there. I think that this is one of the best buying opportunities that I've seen in the last 15 to 20 years. I will tell you as an agent, I am personally going out and buying right now. I just purchased a property and closed on a home just south of the Biltmore two weeks ago. I firmly believe that this is just one of the best buying opportunities. So you have a great selection of homes. Remember 2004 when you couldn't find a home at that time. You would make a bid and, then bid over the asking price and pray that you would get it, even if it did not fit your needs. Now you can actually find a home of your dreams. I do believe that this great selection will go away over the next year to year and a half; as we see the supply start to go away.

b) We also have a historically low interest rate.

c) We have amazing prices, so you can find some really great bargains.

So this all adds up to being able to find the home of your dreams at a great price and at a low interest rate. There have been very few times that I have seen out in the market place that I have seen that. Of course you have to sell your home to be able to get into that poetic dream. Sometimes it makes sense even if you aren't going to get what you thought you were going to get for your home. To get the home of your dreams. You could really negotiate well on that. It is still worthwhile to do that, and get the right interest rate.

I expect at least one of the above opportunities to go away in the next year. From an urban perspective, with construction costs increasing and price decreasing, I believe you will have limited new supply. I have supplied you with a copy of our urban market overview. This is everything that has comes to the market from an urban perspective since 2001, which is really the new type of product you are seeing out there. I believe that you are going to have limited new supply, and frankly there are several new opportunities to buy below replacement costs.

We have a lower net in-migration this year due to people not selling their homes in other cities. We are still going to see over 40 to 50 thousand people of net immigration that is coming here to town. Now that is off from the 100 thousand of net immigration that we used to see, but that is still a huge amount of people. As soon as we see a change in the market and economy, you will see that 100 thousand people coming in again which will also help our new home industry.

I expect to see no more price decline, I think now is the opportunity if you are interested in buying a home, now is a great time to go and take advantage of that particularly as an owner occupant. I think there are some great investor opportunities right now as well if you are a long-term investor. I expect to see 2009 and 2010 kind of flat with maybe a little bit of increase and particularly in a few submarkets, and then I think then we will see long sustained growth. That is personally, and I put my money where my mouth is, how I am investing right now out in the market place.

QUESTIONS:

Where do most buyers come from? Our greatest influx is from California, we have some from the Northwest, some from Texas, a lot as well from Chicago and the Midwest. Surprisingly, we have seen more growth from New York as they are choosing to come to Arizona as opposed to going to Florida.

What is the current inventory out there? There are 53,000 homes in MLS, there area currently 2500 specs, but I would venture to say in the spec market that it is more like 4000 to 4500 and I think from an MLS, I think our current oversupply is 30,000 valley wide. I think 30,000 in MLS is a normal number.

What is the buyer profile for Monteluccia? The 22 buyers here are people that are looking for a maintenance free lifestyle, they look at some of the condos that are available, but they really wanted a high level of service that some of the condos provided, but they really wanted a little more space and particularly a resort lifestyle. They wanted to have room service from the hotel, want to have maid service, their car washed, picked up at the airport, their refrigerator stocked before they get to town, so they really want a pampered lifestyle. The majority of the homeowners here are primary residents, but most of them have a second residence as well so in the summer you can find them in other areas. We do have some people that this is their 2nd, 3rd, or 4th home, and coming from a lot of the areas that we just discussed.

Are you seeing a lot of money coming in from out of the country? We've seen a lot of money coming in from Canada. I have noticed a lot if the Canadians are looking in the 200,000 to 400,000 dollar market. We do see people from all over the world coming here, but not a major influx-similar to what I have seen in the past. There are a lot of people that chose very quietly to make Arizona the vacation get away. There are a lot of celebrities that have homes here and they want to remain anonymous. We have seen people from Dubai.

City North has just taken 60 of their residences and turned them into rentals, so are you seeing that in other condos? Yes, the people who are doing that and the developers that are doing that are doing it for a couple of reasons. One is for cash flow and one is that they are not willing to compromise their pricing.

VALERIANO ANTONIOLI ON THE MONTELUCIA

Montelucia means the mountain of light and in the night in Paradise Valley, you really see the shape of the mountain and it is very romantic. The main highlight of the resort is Joya Spa. It is 31,000 square foot, but it is not only the space, but we have created something special and sophisticated that the journalist Patrice Caramel, who is one of the most famous writers of books about spas, was here last week. She just published, last year, a book on the best spas of the world. She saw Joya and said that it will bring luxury spas to a new level. Last year we started the research on obtaining the best scent for you to use in the body lotion, oil for the message, etc., where we meet two women who are alchemists. They live in Arizona and they have been studying for two months how to create the scent of Joya. One day they came out to Montelucia and saw a cactus that produces a night blooming white flower. They took that flower and took out its essence, and today that is the essence and sent of Montelucia. The cost of the spa only is $31 million, which is $1,000 a square foot. For out salon, we went to New York and hired an artistic director for our salon and we have nine chairs. He owned for nine years a Moroccan oriented salon on 5th Avenue in New York. We convinced him to move here. We are the only spa and salon that has a zero gravity chair. The restaurant is called Prado, it has a beautiful fireplace and we have two Italian chefs from Italy. They are cooking with Spanish accent, but it is Mediterranean Cuisine with fresh ingredients, and perfectly prepared and there is a nice beautiful ambiance overlooking the mountains. It is everything that can make your rendezvous romantic. Then we have Crave. Crave is everything women are craving for. It is chocolate, coffee, gelato, and wine. The wine program is called Desperate Housewines. This is the place that if you live in the neighborhood, you can meet in the morning, read a newspaper, and there are toys for children and parents. We think this is a place women are craving for and it is located at the entrance to the spa. In the spa, we have 5 suites for girls to get together and do things together, say before a wedding for example. You rent a suite and you all spend the day together getting a manicure, pedicure, message, facial, etc. We just want to give you JOY. Sharing the spirit is something that is very unique. We asked 33 wedding agencies what we should do to build the very best Wedding destination in Arizona? We followed their suggestions. We went to Venice and saw the room of the Hotel Cipriani Venezia that is very famous for weddings and we just copied and built it. These are just some of the highlights and we can now take a tour of the Resort.