Stephen Kim: Yes, thanks very much, guys. Great job, exciting times. Ryan, in your opening remarks, you sort of talked about some of the reasons why–you know, some of the ways in which buyers seem to be responding to the rates, and you sort of contrasted or laid out that there’s a psychological component, maybe math versus mental. I’m curious–and you talked about the role of buy-downs in that, so my first question relates to how you think–let’s do it this way. What percent of your buyers are taking a rate buy-down, and when you’re negotiating these buy-downs, you’ve talked about the 5.75% through the end o this year, it looks like, where are you setting new lots, because I imagine you’re negotiating those now for the next batch, where are you setting those lots from a contracted rate perspective?
Robert O’Shaughnessy: Yes, hey Stephen, it’s Bob. It’s an evergreen process, honestly. We are buying contracts typically weekly, actually, and they are market-based. We set the pricing on that, and that determines the price to us to offer that value to the consumer, so the rate that Ryan talked about is a negotiated price and essentially we fill the cost of being able to provide that contract rate to our consumer. There is an upfront fee for purchasing the contract and then there is the rate buy-down as part of that, and so it’s a–you know, it’s not like we’re buying now for three and six months from now. These are contracts that we enter into that we expect to build, candidly, within 30 days, and typically we’re filling them within a week, so it’s a–you know, it’s very market responsive.
As rates go up, it’s why you’ve seen what we’ve offered has moved up a little bit. We’ve increased our cost as part of that to a degree, so it’s a process we’ve been working through for, gosh, 10 or 11 months now since we put it in place, and we’ve found it works pretty well.
Stephen Kim: Just so I’m understanding that, it sounds like what you’re talking about is you have a forward purchase commitment that you’re doing on a relatively short term basis, but then you’re also layering on top of that an individual rate buy-down, sort of ad hoc, if you will.
Robert O’Shaughnessy: These are 30-year rate buy-downs for the consumer.
Ryan Marshall: Stephen, the other thing that I’d maybe just add to your conversation is some buyers, you know, they take the available incentives that we have that get them all the way to 5.75%. There are other buyers that decide that they don’t need to go all the way to 5.75% and they’d like to have a little bit higher rate and use some of the other incentive money that we’re offering for other things that they see value in. We’re seeing about 80% to 85% of our buyers are getting some form of incentive towards interest rates. That doesn’t mean everybody will go to 5.75%. Just some fraction of our total sales end up in that very lowest category. The big headline is that we’ve got the tools out there and our sales team has got the tools out there to help individually solve what each and every buyer needs to make the transaction work for them.
Robert O’Shaughnessy: Maybe to put a finer point on that, as Ryan said, 80% to 85% of the people have an incentive program, only 25% of the business in the quarter was through that national campaign that you asked about, so. Those are targeted to specific inventory units typically, but we offer incentives to all of our consumers – we always have, and as Ryan has stated already today, the vast majority of those incentives now across all of our buyers is financing-oriented.
Stephen Kim: Yes, okay. That was really helpful. Appreciate all the nuances there. My second question relates to getting back to sort of the seasonality. It sounds like you’ve acknowledged that seasonality is sort of coming back into the business. In the fourth quarter, it’s a little weird, right, because the housing market kind of generally slows, particularly in the last six weeks of the year, and I’m curious as to your posture as you assess the buyers. Are you anticipating–do you generally think that there’s relatively more inelasticity on the part of the buyer, or relatively less elasticity might be a better way of saying it, so that it causes you maybe not to push so aggressively on incentives to try to keep up sales momentum in the last six weeks of the year, kind of like pushing on a string.
Is that a reasonable way to be thinking about how you’re likely to approach the market over the next six weeks–I’m sorry, in the last six weeks of the year? Then lastly, regarding risk, you had talked about wanting to evaluate all of your land actions in terms of risk adjusted returns, but you’re also running at a super low net debt to cap, and I’m curious if you move to lower risk through increased incentive–you know, increased land banking, would it be reasonable to think you’ll also carry increased leverage than you currently are today?
Ryan Marshall: Yes Stephen, we are at a very–we’re at a lower leverage rate than what we’ve historically run at. I think that really more than anything, it’s a testament to the strength of the business. We’ve been operating really well and we have been generating a lot of cash. We’ve really been touching kind of all the critical parts of our capital allocation philosophy. We’ve invested a lot of money into land and land development, we’ve been paying our dividend, we’ve bought back the highest single quarter spend in shares this year in the third quarter at $300 million, and we bought back some debt, and with that, we still grew the cash balance, so I think it really demonstrates how strong the business is operating.
In terms of your question on pricing and discounts and elasticity or inelasticity, we’re going to continue to price and set incentives at a level that we think is appropriate for the market. We’re going to be responsive, we’re not going to be margin proud. At the same time, I think we’ve got a good understanding of what value is, and you shouldn’t expect to see kind of the national year-end blowout, red tag kind of screaming baby sale from us – I don’t think that helps the consumer. But I think you’re seeing us put the appropriate incentive load such that we’re turning the asset, we’re turning the inventory, we’re making sure that we’re getting a minimum of two sales per active community, which is kind of the level that I think you need to be at in production homebuilding to deliver the types of return on assets, return on inventory, return on invested capital that we want.
Stephen Kim: Perfect, appreciate that. Thanks guys.
Operator: We will take our next question from Ken Zener from Seaport Research Partners. Your line is open.
Ken Zener: Good morning everybody.
Ryan Marshall: Morning Ken.
Ken Zener: Just want to delve into the option impact on your margins. I think you’ve been saying options have been about 19% of your ASP. Is that still where we’re at in terms of the options?
Robert O’Shaughnessy: We’ve talked about our options and lot premiums being a consistent driver of value. It’s part of the way we go to market. We think it’s one of the strengths of our sales process. In the most recent quarter, that was $107,000, it’s up $3,000 sequentially and year-over-year, so that is still part of our sales operation. It’s how we go to market, and yes, 20% is roughly where we are. I wouldn’t expect that to change as long as market dynamics stay where they are.
