Robert O’Shaughnessy: Sorry, was that–are you asking sequentially or year-over-year?
Rafe Jadrosich: Sequentially.
Robert O’Shaughnessy: Yes, so you’ve got 70 basis points – certainly a part of that is going to be the strength of the–relative to our guide of the strength of the market, where for the spec homes that we sold, we got better pricing, which was a relative margin benefit over the fourth quarter. The other thing is the mix shift, not just in terms of geography, which we had highlighted, but on a sequential basis we also had a mix shift towards move-up, which has a higher margin profile relative to first-time, which is where the margin came from. I hate to use this, but there is mix and there’s a couple of different mixes going on, but when you’re looking at the sequential margin performance, certainly it’s the strength of the market relative to what we thought coming into it, and also it’s a little bit more move-up, which has a higher margin profile for us.
Rafe Jadrosich: Great, thank you.
Operator: Your next question comes from the line of Mike Dahl with RBC Capital Markets. Please go ahead.
Mike Dahl: Hi, thanks for taking my questions. I’m going to stick with margins. Bob, you kind of alluded to this – it’s a tricky time when you’ve just had this rate move, you’re maybe just on the front end of seeing some traffic impacts but you’re having to give guide out a few quarters, and so I appreciate that there’s still some uncertainty when you’ve got a third of your full year closings yet to be sold. Maybe just talk through the assumption for flat incentives against this move in rates. Just talk about why that is the baseline assumption, or if it just felt like the right placeholders and matches what your backlog margins look like today. Maybe just a little more detail on how you went through this process at kind of an odd time, when the rate move just happened.
Robert O’Shaughnessy: Yes, it’s interesting. I’d refer back to something Ryan offered, which is the affordability is still a challenge. Against that backdrop, our expectation is that we will need to continue to incentivize folks, and the predominant way we’re doing that today is through our national commitments and some sort of rate finance support. Our expectation is that that continues. That was our expectation coming into the year. In the first quarter, you heard us say it was 6.5% again, just like the fourth quarter – that’s roughly $35,000, $40,000 a house. In a world where rates are actually trending back up, I think that we’re going to need to continue to support that. It’s a little bit challenging, to your point, but I think on balance, our expectation is that’s where we’re going to need to be to meet some of the affordability needs.
It’s one of the reasons we think you’ll continue to see this strong market performance on a relative basis of new versus resale, because we can offer those incentives.
Mike Dahl: I guess as my follow-up, more specifically, that kind of implies that you’ll get your advertised rate flow up over time to match what the market move is and maintain your relative incentive, and so if you’re allowing your rate to kind of float up, call it 40, 50 basis points from where it may have been a month or two ago, what have you done or seen in terms of thinking about sensitizing some of the recent demand trends, particularly in your Centex brand? I understand that it’s not going to be a major–potentially not as major a dynamic for your move-up or active adult, but in your Centex brand, what’s the sensitivity to a 40, 50 basis point move in rates that you’ve seen or thought about?
Robert O’Shaughnessy: Well, certainly for that true entry-level buyer, it’s the game, right, and so we’ve got programs that offer them lower cost incentives, so we’re giving them more rate support relative to others who have choices. It’s worth it to remember we offer a national program, but there’s a lot of detail in terms of what we can and actually do offer to people and what they want to access in terms of our support. There will be some people with rates moving up that will literally fall off the ability to buy a home – that’s not the case for our active adult and move-up buyers. Candidly, for a lot of our Centex buyers, you look at our average sales price at $419,000 in this most recent quarter, that’s not typically your true entry level buyer – we’re at a little bit higher price point.
Our first time communities are typically a little bit closer in, and so I think it depends on who your buyer is, but to answer your question about will we vary our offering, the answer is yes. We have been. We are actively managing these national programs. We’re buying commitments in relatively small amounts so that we don’t get caught by market changes, and what it allows us to do is change our offering based on what the market is doing. As the market–as rates floated down, we moved our offer rate down somewhat to try and be responsive to deliver a real savings versus the street rate that they can get on their mortgage. As rates tick back up, we’re moving those rates up a little bit. It’s an art, not a science, but I think what you could expect us to do is listen to the consumers in terms of what they need and seek to offer them programs that give them what they need.
Mike Dahl: Thanks Bob, appreciate that.
Operator: Your next question comes from the line of Alan Ratner with Zelman & Associates. Please go ahead.
Alan Ratner: Hey guys, good morning. Thanks for squeezing me in here. Nice quarter. Would love to get your updated thoughts on specs versus build to order. I know you and others ramped the spec production as cycle times re-elongated and there was a premium, or at least that margin differential spec versus BTO was kind of smaller than it historically has been. I’m just curious if you’re thinking about that any differently today with cycle times continuing to normalize and rates seemingly being higher for longer. It sounds like maybe the Centex offering, which is predominantly spec, I would think, is maybe seeing more of that impact than the move-up rate, so are you at the point now where you are kind of dialing back the spec starts a bit, or do you still want to maintain the current mix of your business?
Ryan Marshall: We’re pretty happy with where we’re operating, and we look at a couple–I mean, the first thing we look at is what’s the percentage of build-to-order versus spec sales. Right now, that’s running around 50/50, and then we highlighted in Bob’s prepared remarks, 40% of our width is spec, and we’ve got a little bit higher than one final per active community. We pay attention to it closely. It’s something we spend a lot of time managing and being responsive to what we’re seeing in the market. To your point, most of our spec–our Centex business is spec. We certainly have a little bit of spec in the other two brands, but Pulte and Del Webb tend to be more of a build-to-order model, and we’re certainly responsive to those as well.
We’re going to watch it, but in a higher interest rate environment, having available specs that you can more efficiently and effectively apply the most powerful incentive to in the form of the forward mortgage rate commitments, you can do that better on spec inventory, which makes it more attractive. You’ll probably see us stay pretty close to where we’re at.
Alan Ratner: Great, appreciate your thoughts there, Ryan. Then pivoting to the incentive environment, I think obviously you guys certainly made the right call by not chasing the market lower in the fourth quarter, based on your performance this quarter. It sounds like from your guide for flattish incentives, you’re not expecting to have to ramp discounts as the selling season moves into its later stages, but what is the sensitivity you’re looking at there? How much longer will the more recent, I guess softer traffic trends, or maybe sales activity, how long would that have to persist before you would sit there and say, you know what, we need to maybe increase those incentives a little bit to bring up the sales pace? Is it a few months, is it getting past the peak of the selling season and you’re sitting on more inventory than you’d like? What’s the decision process there look like?
Ryan Marshall: Yes Alan, we look at sales rates every single day – it’s one of the first emails that I look at, what did sales for the prior day come in at, and we look at qualitative and quantitative feedback that we get from our field operations in going through that decision making process. What I can tell you is the rate–the change in rage, nevermind what it was and nevermind what it’s going to, just the mere fact something changed, we’ve seen that cause pauses in buyer behavior over the last two or–you know, last 24 months. Anytime there’s been a step change in rate and the media cycle that goes with it, that certainly has a pretty profound impact on buyer behavior. Time does seem to cure it. The only thing that I would continue to caveat and put out there is that affordability continues to be a real issue, and so we’ve got to balance the change there.
We think–you know, one of the things that we’re going to continue to do is pay attention to what the headline rate is, and Bob talked about that a few questions ago. Our national mortgage rate incentives have got the flexibility to move based on what the market’s doing, so we still think we can have a compelling offer out there relative to the street rate that doesn’t necessarily cost us a whole bunch more, relative to what we’re currently paying. The last piece, Alan, is we are going to keep our production machine moving. We are a production builder and we’re going to do that in a way that we think optimizes kind of returns, so if there are price changes or discount changes that ultimately have an impact on affordability, that allow us to continue to turn the asset and keep the market share that we have, we’ll definitely do that.
Alan Ratner: Thanks a lot for the thoughts, guys. Appreciate it.
Operator: We have reached the end of the call, and we’ll take our final question from Ken Zener with Seaport Research Partners. Please go ahead.
Ken Zener: Good morning everybody.
Robert O’Shaughnessy: Hey Ken.
Ken Zener: Wonder if you could just give some context on the regional comments you made, and I want to narrow it down to Florida because it’s a segment that obviously generates quite a bit of your EBIT. Can you, within Florida, talk about how that existing market supply rising affected, let’s say, the Centex versus your move-up brand, realizing Orlando is different than coastal markets? It’s such a big market for you guys profitability-wise. If you could maybe give a little color related to the margin swings you’re kind of seeing with those trade-up buyers’ entry within markets that are seeing the pick-up in inventory specific to Florida, thank you.
Ryan Marshall: Yes Ken, I want to make sure that I understood kind of the full question. Maybe I’ll give you a little bit of Florida commentary and then if there’s more follow-up, I’ll let you ask that. Florida is a tremendous part of our business. We’re in nearly every major housing market there save Miami. A big part of our business there tends to be focused on move-up and age targeted. We have some entry-level business in our Tampa and Orlando businesses, but the other big markets are predominantly move-up and age targeted. We get a little bit of move-up in Jacksonville as well–or a little bit of entry-level on Jacksonville as well, so. Really strong business, a lot of job relocation there, a lot of folks that want to be there because they’ve got flexible work arrangements that allow them to work from home or work from elsewhere.
The headwinds in Florida are definitely affordability – we’ve seen strong price appreciation in most Florida markets, and then the other headwind that you’ve got there is around property taxes and insurance. Certainly those things kind of play into that, but Florida continues to be a big part of our business and a real bright spot for our business as well.
Ken Zener: That was sufficient, thank you very much.
Operator: I will now turn the conference back over to Jim Zeumer for closing remarks.
James Zeumer: Great, appreciate everybody’s time today. We’re around the remainder of the day for ay follow-up questions, and we will look forward to speaking with you at various upcoming conferences and/or on our next quarter’s earnings call. Thanks for your time.
Operator: This concludes today’s call. You may now disconnect.
