Robert O’Shaughnessy: Yes Mike, you know, you can see in our data we’ve got about a 6% incentive load – that’s $35,000 a unit, rough math. That actually is down 10 basis points from Q2 of this year. It is certainly up – it was 2.2% last year, but the sales environment that led to the closings in Q3 of last year was dramatically different, so you can see kind of a normalization here at 6%. I think you can take from our margin guidance for Q3 what we see closing in the fourth quarter, and we’ve got pretty good visibility into that at this moment, will not be significantly impactful. I would highlight that we’ve given a continuation of that same guide at 29.5% on margins. We have told you we’re going to be at the lower end of that, so there is some cost to this interest rate environment.
Michael Rehaut: Right – no, appreciate that, Bob. I guess secondly, maybe bigger picture conceptually, you talked about earlier in the call questions around your higher gross margin versus your peer group. When you think about the 6% today versus 2% a year ago, and I don’t know if that 6%, I want to say it’s a little bit above your longer term average maybe around 3%, how does that square with the level of gross margins you’re generating today, and if you think about over the next couple years, we’ve heard different things from different builders about maybe increasing hurdle rates from underwriting about–you know, just thinking about higher cost land perhaps might flow through over the next couple years. You know, if incentive levels stay where they are, would that suggest kind of a moderation a little bit from the current level of gross margins, or how should we think conceptually about the next couple of years directionally for this metric?
Ryan Marshall: Yes Mike, our crystal ball at this point, a couple of years out, we’re not there yet. We’re still kind of focused on Q4. We’ve given a guide for that quarter, when we get to kind of the end of Q4, we’ll certainly give a full year guide for the balance of 2024, but maybe the thing I do want to address is the incentive load that we currently have, that is allowing us to offer incentives on the interest rate, that’s been in our margin guide and our results for the entire year. You’re seeing the impact of offering below-market interest rates as an incentive. It’s been in Q2 results, it was in our Q3 results and it’s in our Q4 guide, so no guidance about what margins direction will be beyond Q4 of this year, but that’s all embedded in our–you know, to this point, everything that we’ve been doing, that’s embedded in the results that we’ve delivered and the guide that we’ve given.
Michael Rehaut: Appreciate it.
Operator: We will take our next question from Joe Ahlersmeyer from Deutsche Bank. Your line is open.
Joe Ahlersmeyer: Hey, good morning everybody. Thanks for taking the questions. I appreciate the data point about the active adult community in Michigan – hopefully snow removal is included in that HOA fee!
Ryan Marshall: In fact it is, Joe.
Joe Ahlersmeyer: Good. Look, market conditions, that’s what’s going to determine the margin volume and price into next year. I think it’s an under-appreciated element of your business. Of course, the composition of that can vary, right, within the definition of success, but you are obviously appropriately acknowledging the headwinds here. Maybe if you could just talk instead to the return headwind from this, instead of either the absorption headwind or the gross margin headwind, just how are you thinking about returns on capital, and then similarly returns on inventory if interest rates remain high? You’re basically at net zero debt now. Just how you’re thinking about ROE relative to ROI.
Ryan Marshall: Yes Joe, thanks for the question, and I’ll do my best to give you an answer. For the last decade, maybe even going on 12 years, the way that we’ve operated the business has been with a singular focus on delivering the best possible return on invested capital that we can. Given the capital intensive nature of this business, for us we think that’s the best way to make decisions and to operationalize our platform in a way that delivers high return on assets, high return on equity, whatever metric you want to look at. I think we’ve clearly done that. I highlighted in my prepared remarks that for the trailing 12 months, we delivered return on equity over 30%, and part of that derived from running a good business but also a very thoughtful and disciplined way in allocating capital, which includes things beyond just buying land and building homes.
We are paying a dividend, we’ve bought back near 45% of the company over the last 10 to 12 years that we’ve had our share buyback program in place, and we just highlighted this quarter we opportunistically took advantage of the opportunity to buy some debt in, near term debt in that was trading below par. You know, I think maybe the best way I can describe it, Joe, we’re going to continue to focus on buying assets in great spots, turning those in a way that delivers high return on invested capital, and one of the other things that I think can also continue to give us flexibility and return-enhancing leverage is moving our land options to 70%, so. We sit at 53% today, we’ve given you kind of a long term target of 70%. We’ve got things in place and work underway that will help us get there.
Joe Ahlersmeyer: Appreciate all those thoughts, Ryan. As a follow-up, just maybe on the comment around matching starts to orders, should we interpret that as roughly 7,000 starts in the fourth quarter, or is that more of a comment on what the fourth quarter orders look like, that’s what your starts might look like?
Ryan Marshall: Yes, fourth quarter starts will be more reflective of order trends that we’re seeing in the fourth quarter. We’re starting more spec than we historically have. We’ve highlighted that we’ve completely moved our first-time business to a spec business, so some of that’s predetermined based on what we saw in the third quarter and what we would anticipate. But we’re just not going to get into kind of a position where we’ve got a build-up of spec inventory that creates pressure to do things that are unnatural on the pricing, but we are going to put some units in the ground to have those ready for Q1. You saw us do that last year, in the back half of last year that set us up for a really strong Q1 of 2023, so.
You know, I’d want you to hear balanced approach, inventories going into the ground, we’re going to have it ready for Q1, but we are going to be responsive to some of the headwinds that we’ve acknowledged are out there in this current rate environment.
Joe Ahlersmeyer: Sounds good, thanks a lot.
Operator: We will take our next question from Stephen Kim with Evercore ISI. Your line is open.
