Two and a half years ago the former chief executive of Centex Corp. engineered and helped shepherd the marriage of Centex, a company he had toiled at for 35 years, to Pulte Homes, the second-largest builder in the country.
For two years after the August 2009 merger, which turned Pulte into PulteGroup, Eller sat on the newly merged company’s board as vice chairman. By agreement, he resigned from the board in August, finally cutting ties with the remnants of the company where he has worked for most of his life.
Recently Eller, who is now 63, sat down to chat with Builder about what comes next in his life post Centex-Pulte, his guesses about when things will get better for builders, and the genesis of the Pulte-Centex “combination.”
B: So what’s the new chapter in your life?
TE: I can’t say there’s a new thing yet, but let me just start by saying I kind of grew up wanting to be a builder. I didn’t really realize it at the time, but I was very fortunate to realize my ambition. From the time I went to college and majored in construction management to now, I have always derived a lot of pleasure and satisfaction from being a builder, so I think I will continue to be a builder.
B: You can’t help it, can you?
TE: I can’t help it. I think it’s a noble endeavor. It’s also fun. It’s also creative. It’s also ever-changing. It’s a way to express one’s energies and ambitions. I think I will always do it. I think I will always be in it until I kind of keel over.
B: Is it in your family?
TE: My uncles were builders, and I certainly worked on construction projects during high school. I think I didn’t realize it as I grew up, but it became something that I wanted to do. It's what I always wanted to do.
B: I think you are one of the few people who rose to the level of CEO of a large home building company whose background is on the ground of home building.
TE: I was very fortunate to be at a company that allowed me to grow individually and achieve my ambitions and, frankly, go far beyond my initial ambitions.
B: All you wanted to do was build houses?
TE: Exactly. That is what I had fun doing.
B: So, you say you will be building houses, but no specifics so far?
TE: I had a non-compete with Pulte during my tenure on the board, and I wouldn’t have competed with Pulte. But I was able to do a few things that kept me in the industry. I joined another public board, PMI Group, which has its own issues now because it is in the mortgage [insurance] business.
I joined the board of another company called BuildLinks, which develops software for the home building business, because I like the people, I like the product, I like the direction. It is very similar to what we were doing at Centex and a couple of Centex people are with BuildLinks.
And I also joined an advisory board of a private equity fund that focused on distressed housing opportunities, called Encore Housing Opportunity Fund.
I also started to acquire and develop urban infill properties in Dallas, small scale, single-family, and multifamily. It again kept me in the industry doing some fun things.
I’ve also invested in a company [TegrityHomes] that basically does hurricane rebuild in South Texas, which is more akin to a Habitat house kind of venture that is funded by the State of Texas. We build houses for people who went through hurricanes Ike and Rita, which were several years ago. Their houses are not habitable. We basically tear down the existing structure mostly and rebuild what is, essentially, a Habitat house.
B: Ike and Rita were a while back.
TE: Exactly, it takes that long to get these funding mechanisms to work. It’s a program that lasts for another two years and then that’s the end of the funding.
B: So is that a non-profit organization?
TE: It’s a for-profit organization, and the margins are good and the earnings are good. And because the funding will terminate in two years they are looking to converting into the merchant home building industry. That may be a platform by which I get back into the industry.
B: It sort of seems like you are already back in the business.
TE: Maybe [this will be] in a somewhat larger scale.
B: Are you still on all those other boards?
TE: I am. It kept me busy and it kept me connected. Now leaving the Pulte board I think I’ll turn my attention to our urban infill business and the transition of TegrityHomes into merchant building.
B: Infill in Dallas? I don’t think of Dallas as being an infill type place.
TE: It actually is more of an infill place than you would think. We at Centex bought a company about 10 years ago called CityHomes, which was an infill developer of townhouses and condominiums, basically three story walk-up structures. It was a great business, a wonderful business, so I’ve teamed up with one of the former founders, Alan McDonald, of CityHomes and we are doing some of our infill work in conjunction with him. So it’s a business that we are familiar with and have experience with, and it’s fairly robust in Dallas. It’s also fairly fun to do the urban redevelopment.
B: Well at least that all is close to home.
TE: Which is a big attraction. After spending the better part of 20 years on an airplane flying one way or another for most of the year, it’s nice to be home and close. The furthest I have to think of going is Houston. It’s a nice respite from a fairly hectic period of time.
B: When you talk about building this TegrityHomes brand into more of a merchant builder, are you talking about moving it out of Houston to Dallas?
TE: Our focus now is Texas. Texas is creating more jobs than any other part of the country. And fundamentally this business of home building is driven by jobs . [The lack of jobs] is really the cause of the industry continuing to linger in the continuing recession.
And also noteworthy is that once you get a job you have to feel secure in that job before you buy a house. You have to feel secure for a period of time …. So usually home building lags job growth by 20 to 24 months. So, even when we start getting job creations, the home building industry is not going to push back into full throttle [right away]. It’s going to take some time.
B: It seems like everybody is trying to get used to operating in this environment that is going to exist for a while.
TE: Yes, and that’s really the unfortunate thing for lots and lots and lots of people. We can measure [the beginning of the downturn] from July of 2006. From that point on, we started to have to discount our prices, not a lot at the beginning, but our cancellations started to go up. Everything started to change. And, initially I think everybody thought, "This isn’t going to be very bad, a pause if anything, then we will pick it back up." But we didn’t know all the tentacles that were involved.
So then, by 2007, 2008, certainly 2009, I came to the conclusion that I couldn’t really see the end of this [housing slow down]. This is my sixth cycle and I can really kind of catalog each of the other cycles. They were fairly predictable in their outcomes. This one wasn’t and still isn’t.
B: So what you have to do in this environment is deal with what you have got, and you have found a way to keep building houses through TegrityHomes.
TE: Yes, I am a minority investor in that. Its not my company at this point, but one of my investments.
B: I guess you yourself are doing what everybody in home building is trying to do now--find a way to make a living in this kind of environment
TE: Right, that is exactly the way to characterize it. Everyone, the survivors anyway, are finding ways to shrink down their organizations. They have already done that. When you think of the public home building companies, how large they had become, the magnitude of the adjustment they need to make and are making to make money is tremendous. So they have all become smaller and more consolidated and probably will have to continue to do that for another year or so before we see positive results.
We are also seeing some new startups--smaller builders who are taking advantage of this cycle too.
B: Well, if you have a fresh balance sheet and no debt…..
TE: You don’t have any legacy issues. You have the ability to grow without having the burden of some baggage.
B: The constant debate in the industry is ‘Who has the advantage? Is it the public builders or the small privates?’ Now if you want to start up fresh you have an advantage again as a private builder.
TE: You do. There’s still a dearth of capital. It’s starting to come back in bits and pieces, but you do have an advantage if you don’t have legacy issues.
B: So was 2007 the time when you began to think that you might need to do a merger to make things work for Centex?
TE: Well, during that period of time we sold off all our ancillary businesses. We had a sub-prime mortgage operation.
We were able to sell that before the big sub-prime crisis had started to deteriorate. We had a construction company that was an extremely well-run construction company, heavy general construction.
[We also had] a $2 billion-a-year general construction company. We built a number of buildings in Disney World, for example. But it had $5 billion of bonds, so we were starting to come up against some bonding issues. So we sold that company. It still exists today.
And there were a number of other smaller, more diverse companies we were able to sell off. We sold it all.
B: So you were pulling back to core?
TE: We were going back to core, and at the same time we were shrinking the home building company because the business was shrinking. And we were constantly looking at "How do we optimize our core home building operation?" We ultimately came to the conclusion that we had lost so much scale and we were so sub-scale in so many situations that we would either have to close more than half of our operations or merger. And when we did the merger math it made all the sense in the world to merge with another company.
B: When did you do that math?
TE: That was in 2008 and early 2009.
B: You were building everywhere, really, and you ended up with a footprint that continued to be wide, but it got thinner and thinner.
TE: Yeah we were already kind of wide and shallow, and we became shallower and shallower.
B: So you started looking around for a new partner.
TE: Yes, and we pretty much knew who the most compatible partners would be from a market combination standpoint.
B: So you looked at market synergies first?
TE: Exactly, thanks to you [Builder Magazine] we had all the market data, who was where, what all they did. So we could do the math and figure out where the highest level of synergies would be in a combination.
B: And Pulte? KB?
TE: There were three builders that we contacted and Pulte was, of course, one. We didn’t disclose the others then and I won’t now. Richard and I had had discussions maybe even a year earlier about a combination.
B: In 2007 or something?
TE: More like 2005.
B: Even before things got bad?
TE: Yes, and we had discussed it and thought it wasn’t right at the time, and so when I called Richard [Dugas, Pulte’s CEO] about a potential combination he had already thought it through previously and we both thought that the timing was good for both companies. Then in 2009 we moved very quickly, very aggressively. We got it done
B: It was fast.
TE: We were very thoughtful about how to put the companies together. It was basically a one-third, two-thirds merger. Centex had one-third of the assets. Pulte had two thirds. So it was very easy to put the two together when we just thought of it that way.
We went through five levels of the organization in terms of who did what and where did people go. The day we closed we had put that plan in place, and it worked extremely well and ahead of schedule.
B: How difficult was that for you?
TE: From a management standpoint, not that difficult because they are very compatible. We had the same cultural values, which is extremely important in a merger.
From an emotional standpoint, certainly it was. I had been at Centex for 35 years. There is something emotional about selling something that you had been a part of for so long. But the way I looked at it and, I think the way Richard looked at it, was that this is a combined company. The Centex brand is on the company, and it’s the best of both cultures.
B: You were part of making the merger happen and involved in those details, but as time went on your connection to the company became less and less as your time on the board drew to the end. Was it a difficult weaning?
TE: No, not at all. The combination of the board I think is one of the strong outcomes of the combination. The combined board of the company is very strong and I am proud of it. It is an excellent board. The management team, the combination of both companies, is an excellent management team. So the structure of the company, I couldn’t have hoped for better. It actually exceeded my expectations, and working with the board members and working with Richard on the board was a very rewarding experience. I wanted to make it a positive experience for everybody and if you asked everybody they would say it was.
B: The fact is that since the merger everything has deteriorated even further as far as the market in general. Did anybody think it would get that much worse?
TE: We had a bit of optimism along with the [2010 home buyer] tax credit. Misplaced optimism as it turned out. [The tax credit] worked out better than anybody thought it would. And, coupled with continued deterioration of the jobs market and the economic market, yes, I think the deterioration took everybody by surprise, and it took most everybody a little while to react.
I call it a head fake.
B: There were a number of head fakes along the way. It was one thing after another just when you thought you had figured it out and it wouldn’t get any worse, something else would happen to slide things further down the hill.
TE: It’s been unprecedented.
B: Even for a veteran such as yourself?
TE: One of the concerns I have right now is that there seems to be kind of a form of inertia setting in. You would hate to think of this as being the status quo. There will be something to catalyze the recovery, but it’s not clear what it’s going to be or when it’s going to be. And you just hope that this kind if inertia doesn’t continue to exist.
B: When you say inertia, do you mean that things continue to be the same, they don’t improve at all?
TE: Yeah, people in general hunkering down
B: What else is interesting that is going on right now that you might want to share some comments on?
TE: Back to the Pulte Centex merger, just to complete some thoughts there, I am very comfortable leaving the board. I am very comfortable with the direction [of Pulte management]. I am very comfortable that the combination [of Centex and Pulte] was the right thing to do. I thought so at the time we did it. I still think so now. And I think the combination takes some time to fully realize the benefits, but I am confident that all the benefits will be realized as the market continues to do whatever it is going to do. And, I am very pleased with the strong brands that Pulte has focused in on: the Pulte brand, the Centex brand, the Del Webb brand. It is going to provide levels of differentiation.
B: It does make it a one-stop shop, a cradle-to-grave kind of builder.
TE: I think they have concluded that those three brands that they have focused on now are strong brands. They are brands to build the future on.
B: Pulte has had some criticism from analysts for their financial results compared with other builders. Do you think that is just a temporary slump? Do you think it’s something the company is going to be pulling out of sometime soon?
TE: I’m confident in the direction of the company.
B: And now you are heading in your own direction.
TE: I’m keeping myself busy and it’s fun.
B: It probably feels pretty good to get your hands down in the dirt again with home building. Being a CEO of a large organization you didn’t have as much opportunity to be as granular with things.
TE: It does [feel good]. Actually, I have to go back 20 or 25 years when I was doing this stuff before.
B: Are you learning new things about the way houses are built these days?
TE: There is not that much new, frankly, but it’s interesting to get back in to understanding the tradeoffs that everybody has to make to create a home that people can afford, that is good for the people, good for the economy, good for the environment. Those are things that I think I believe make it a noble endeavor, a noble industry. I enjoy it tremendously.
Teresa Burney is a senior editor for Builder magazine.