A Conversation With Mason Gates

Mason Gates is a self-storage broker that has a dominance in Nebraska and the Midwest. In this Special Report he discusses proper broker etiquette and interaction as well as the current state of the self-storage market. If you are looking to buy a self-storage facility you will find this conversation extremely interesting and timely.

A Conversation With Mason Gates - Transcript

0:00:00.0 Frank Rolfe: This is Frank Rolfe with Self Storages University. I'm here with Mason Gates at Matthews Real Estate Investment Services. Mason is a broker of self storage, but beyond that, he's got a whole lot of insights. He's really been hitting the streets hard, getting lots of listings, lots of things sold, and so we thought it'd be interesting to bring him on and talk for a little bit regarding how to have a healthy relationship with brokers because brokers have always proven to us to be the number one source by far of all the deals that we've done over the last 30 years. But to utilize brokers, you have to know the correct etiquette, have to know how to interact, what to say, and so we thought that Mason could give some good insight to that. So, Mason, are you here with us?

0:00:54.7 Mason Gates: Yes, I am. Thanks for having me today.

0:00:58.1 Frank Rolfe: Oh, yeah. Well, we're thrilled to have you. So Mason so let's just start off with a simple question. All right. So when someone calls you, when someone's trying to reach out for the first time ever, reach out to Mason or any broker, what should they say? Like what should your elevator speech revolve around in that initial contact?

0:01:20.0 Mason Gates: Yeah. Yes, for sure. So, I mean, first of all, typically us brokers, we don't get inbound calls very often. But when we do, it's always very exciting. Whether it's, "Hey, I own 10 facilities, or I am looking to get my first," it's very exciting for us to be able to walk them through what we're seeing in the market, because ultimately, like I spend in a given day, anywhere from 10-12 hours on the phone, just talking with owners, hearing what their plans are and seeing how I can be a resource to them. As far as what we like to hear from potential buyers, we really like to hear what their credibility is, what their background is, what their motivation for getting into storage is and what kind of makes them a sure bet.

0:02:04.7 Mason Gates: I will say sometimes I get inbound calls from... It could be like a tire kicker. Just somebody, oh, yeah, I'm thinking about getting into storage. But they don't pose a very high level of confidence when it comes to executing with them. So if they're really looking to get into storage, specifically we wanna hear high levels of confidence, an ability to execute and just asking all the right questions that make us think, they've done some... At least a little bit of research on their own to see if it's a good investment, and just making sure that they kind of know what they're talking about.

0:02:43.4 Frank Rolfe: And when someone first calls you, from that point forward, how frequently should they continue to contact you? What is the correct pace as far as reaching out to you to stay in touch for listings and things like that?

0:02:58.7 Mason Gates: Yeah, great question. I would say there's no limit really. I mean, if I got a call every single day from a potential buyer hounding me for deals, that's obviously a good sign. It shows well for that buyer. It's also something I can bring to sellers, "Hey, I've got this guy who's been absolutely hounding me on the phone, wants any deal I can bring out to market, let's get this thing listed up." So, from my perspective, I think there is no limit. I think you can reach out as much as you want, as frequently as you want. I know we had a deal recently where it actually was under contract for quite some time, and I had this buyer who, when the first time I got on the phone with him, again, it sounded kind of like he didn't really know what, if it was something he wanted to get into, but he reached out to me three or four times while we were under contract, and we did actually end up falling out. And we went back under with that buyer, and they actually executed on it. So, it was a great deal to get done and it was a first time storage buyer. So in my opinion, I don't think you can follow up too much.

0:04:04.8 Frank Rolfe: And do you email out when you, let's say you get a deal with a listing. Do you email that out to the people in your database or how do people access the listings that you get all the time?

0:04:21.3 Mason Gates: Yeah. Yeah. So we have a very good marketing timeline as far as things go. So typically, when we get a listing, we're gonna be working it internally to start, just because those are the buyers that have been vetted, people we've worked with in the past. And we also just work with... For me, I typically have a list of about 30 people that anytime I get a listing, I know those are buyers in my market who are capable of executing, or I've worked with in the past, whatever it may be. It's just, I have a high confidence level with them. And that could be specific to each deal, obviously. But overall, I mean, we'll usually do internal marketing email blasts. So if buyers are ever looking to be put on our email blast, I'd happily put them in our system and then they'll get all the information regarding any listings we bring out to market.

0:05:10.9 Mason Gates: And in those emails, we typically have a link where you can download the offering memorandum, a brief area overview, investment overview or investment highlights rather, and just photos of the property. And so that is typically how we market it initially. After a certain period of time, if we feel as though the property may not be selling just to our internal database, we'll consider putting it on third party sites. But realistically we, the deals that I've been selling this year, I haven't really found it necessary to be putting them on third party sites. I do put them all on there just as far as track record and credibility goes, but we're able to get a lot of our deals done just internally. So, being put on those internal lists is very beneficial as a buyer in my opinion.

0:06:01.3 Frank Rolfe: And then what happens if you have more than one potential buyer? Let's say you have a listing and it's attractive to more than one individual, which I'm sure happens frequently. How do you pick and choose and therefore, how does the potential buyer best present themselves to be the one that you select? What are the attributes you're looking for?

0:06:20.5 Mason Gates: That's a great question. So a lot of times, especially when we're talking about more higher price point deals or just a very high level deal, the things we are looking for is oftentimes buyers will send a cover letter with their LOI or letter of intent or just preliminary offer. And that is very nice for us to see because it gives us kind of an insight into who we're talking with. It'll tell us a lot of times about their transactional track record. It'll tell us about that the individual's background, if it's an LLC, it'll say here's where the partners got their money from. Here's what they've done in the last five, 10 years, whatever it may be. And so that I think is something that's really beneficial. And it's nice because it's something we can bring to the seller and say, "Hey, listen, this is... Maybe this offer is 10 grand below the other guys.

0:07:13.9 Mason Gates: But here's a proven track record and all of their information that they've filled us in on that makes them a better buyer to bet on when it comes to actually getting this deal across the finish line." So the biggest thing that we look for as brokers from buyers is, again, especially in a market like we're in right now, where there is a lot of uncertainty and we don't know if buyers are gonna stay in the deal, is we want to see competent and credible buyers who typically have experience, but if not are extremely motivated to take down the property.

0:07:47.5 Frank Rolfe: And let's talk a bit about what you're seeing out there. So give us the current update on the market. What are you seeing as far as cap rates and timeframes from start to finish? What are you seeing out there?

0:08:01.7 Mason Gates: Yeah, so I was recently in Las Vegas for the National SSA Convention, and I actually got a great feedback from some of the groups as far as what their buy boxes are looking like nowadays. The biggest key right now is, I mean, if we're talking about class A, multi-level, climate controlled state-of-the-art facilities, even those, I mean, buyers are wanting to see minimum six cap incoming, they want to see eight cap plus pro forma. And if it doesn't hit those, then it's typically not a deal that they're gonna look at. I think if we're talking about like deals that are a little bit weirder, like TFL [0:08:45.0] ____ or lease-up or whatever it may be, where you can't really judge the incoming cap rate, that's a different story.

0:08:51.9 Mason Gates: But generally speaking, a somewhat stabilized facility, they're gonna be looking for a six cap incoming minimum. Now, with regards to my market specifically, which tends to be the Midwest, cap rates, they're kind of all over the place. What I've found is that, because it is such a niche market out there in the Midwest, it's really what are buyers willing to pay, period 'cause each buyer is willing to pay a different price depending on how much equity they have, how much of the market share they currently have in that market that they're looking at the deal. There's just a multitude of things they're looking at. So maybe one day we're getting a deal done at like an eight cap incoming, but the next day we're getting a deal done at a sub six cap.

0:09:39.4 Mason Gates: So it's a very weird market to be in for sure, but that being said, it ultimately comes down to just knowing the margin. And so that's why, in my opinion, it's more favorable for sellers to work with brokers, than to not, because not only do we increase exposure and we put it out to 16,000 times more people than the one-off market offer they've received, but on top of that, we actually talked with these buyers. So we're familiar with every single buyer in that market, and we know exactly what they're willing to pay because they've given us their acquisition criteria, they've given us their buy box. And so if anyone is able to get the deal across the finish line at the highest price possible, it's most likely gonna be a broker.

0:10:23.3 Frank Rolfe: And let me ask you on that. First, let's define terms. When you say six cap going in, eight cap pro forma, what we're saying is it's priced at about a six cap from the seller and now the buyer is going to expand the net income up to target of a eight cap over what period of time?

0:10:46.0 Mason Gates: Yeah. So, typically when we say incoming cap rate, that's gonna take whatever your gross income or net operating income, whatever that may be. And that's how we're calculating your current incoming cap rate. As far as pro forma cap rate goes, that is pro forma or stabilized cap rate, which is typically mapping anywhere from three to five years out. Taking into account things like decreasing economic vacancy, which is oftentimes attributed to grandfathered tenants, owner occupied units, and also we're taking into account rental rate increases. So that's gonna be contingent on the market, like how far below market is the owner currently?

0:11:25.8 Mason Gates: And how solid is the market as far as the promise for rate growth over time? But for Nebraska, which is again, one of my main markets where I have a dominant market share, I would say like, I typically apply a 15% rate increase over the course of three to five years. I think that's more than reasonable. But if we're talking about major markets where maybe somebody's 30% below market, you could bump quite a bit, as far as pro forma goes, but typically the number one thing that that pro forma cap rate is gonna be attributed to is the economic vacancy, which again, comes down to grandfathered tenants, owner occupied units, and just areas where maybe the facility could be earning more income but isn't currently.

0:12:14.0 Frank Rolfe: And what kind of interest rates are you seeing on loans right now?

0:12:17.8 Mason Gates: Yeah. I will say they're kind of all over the place. That being said, I've been working with one of our capital markets guys here, Matthews, and he's been getting me some really favorable rates. I know we've gotten quoted, we got quoted I think like a month or two ago at like 7% on a deal on a Native American reservation that was a smaller town kind of in the middle of nowhere. So that was really good to see that like we're still getting sevens. I think it's probably gone up to maybe another 25, 50 basis points, but still, I mean, we're hearing a lot more negatives from people than we're hearing positives. The biggest thing with debt right now is you just have to put more down. So when you're buying a storage facility, lenders typically want to see a 1.25 debt service coverage ratio as a minimum, which oftentimes requires putting upwards of 30 to 40% down minimum. But it can be, I've seen 50% down, we just did a deal where it was 50%. We're doing one right now where it's like 75% down. So the biggest objection we're getting from buyers right now is just how much they're having to put down on the properties.

0:13:33.5 Frank Rolfe: Right. And in all fairness, if you had to put down 75% on a property, you're with an LTV that low, your overall cash on cash return is way lower than what many people are after, correct?

0:13:48.4 Mason Gates: Right. Right.

0:13:49.2 Frank Rolfe: So if you bought something at all cash at a six cap, you'd be at a 6% overall return. And if you can't really lever it at seven because then you're negative leverage if the interest rate's at seven. So clearly creative financing right now is probably more essential than ever. Trying to figure out a way to bridge the gap. Do you see the, is there... Do you very frequently see seller financing in self storage? Or is it pretty much all just bank?

0:14:19.5 Mason Gates: It's funny you bring that up. So I think it's so ironic when we get listings, I've seen a lot of off market deals being traded with seller financing. But oftentimes the sellers we're working with who wanna list with a broker, they don't wanna do seller financing. I think it's nice if they offer it but we're still getting deals across the finish line. We're pricing things as if they're gonna be sold with having actual debt from a bank on the property rather than seller financing. Sometimes we do have sellers say, "Hey, listen, I'd be open to seller financing at these terms." But again, it goes back to where we're at right now, which is the pricing disconnect between sellers and buyers. And so because of that, the same thing is happening with seller financing, where sellers, they have these kind of outrageous terms sometimes for what they want, if they're gonna be offered seller financing.

0:15:12.5 Mason Gates: And then buyers are low-balling them with oftentimes very bad seller financing offers. So if I had it my way, I would like to see just conventional financing or all cash. But seller financing is something that is happening right now, I think more so than it was say two years ago. But I'm not seeing it very much when it comes to on market deals. And most of the sellers that I'm working with are very opposed to it. And I think the reason why is because anybody realistically could throw out a seller financing offer where they're putting five, 10% down and then offering 4% interest rate. But sellers don't want to take that, and sellers are looking for 60% down with 8% interest. And it's like, well, at that point you can just go to the bank. So again, there's just that disconnect there and that's causing a lot of issues. And that's the reason why I think most of the deals I'm working on, I'm not doing seller financing.

0:16:10.7 Frank Rolfe: Sure. Well, and also it's been my experience 'cause I've been through every recession since the '70s and recessions, depressions, aberrations, instability are a really good time to get into stuff because people are, sellers particularly are more focused. They're not as proud of what they have. They're more flexible. And of course, if you buy when rates are high and then the rates go down, you look like a genius even if you didn't do anything [laughter] because suddenly your cap rate of today and interest rate or the interest rates go down, therefore the cap rates go down, which means the values that you just bought went up. So I'm all for that. Let me ask you this. Obviously you've had the largest runup in interest rates in, well, the second largest in American history.

0:17:08.3 Frank Rolfe: We don't know where it'll end. I mean, maybe the largest, I don't think so 'cause I was around when Reagan took them to 18%. I don't see that happening now. But you had, I don't recall even under Reagan, it being this brisk, where in 18 months they went up five points. So you have, I assume, people who bought things prior to Q1 of '22, where they may have bought that storage property at a four cap or five cap, and now they're way underwater and they may have debt, which was three to five years in length. Now it's coming due. And are you anticipating seeing some are hardship selling coming up at some point from people who...

0:17:58.0 Mason Gates: Yeah. I do think so.

0:17:58.9 Frank Rolfe: Who way overpaid and can't... I mean, just, let's say you had a traditional mortgage at 30% down and now you go to the bank, the bank says, well to meet the coverage ratio, you gotta be 75% down. And they don't have the cash to cover what is effectively twice their down payment. So how do you think all that will shake out? Will there be some opportunity on that coming up?

0:18:17.0 Mason Gates: Yeah, it's certainly gonna be very interesting especially I think once 2026 comes around or even '25 just because people are gonna be looking to plan ahead. But yes, I mean, based on the feedback I've been getting, so I will say sellers' expectations have come down slightly, but not nearly as much as they should. I know I recently priced a deal at like four and a half million. And seller basically told me, "Well, I got offered 6.2 million a week ago." And when I'm looking at that on a price point, that's like a four cap. So I don't know who is offering these numbers. It could be like a ghost. I really don't know. But some of the feedback I've been hearing from former owners of facilities who did sell back in 2021 when interest was as low as it was, these people are getting bought out for crazy numbers like three, four caps, just insane numbers and in markets that are very saturated for facilities that are good but not good enough for a three or four cap. And so I think that there is gonna be a big exodus here in like 2024, 2025, when people realize, shit, I've got a loan coming due and I'm not gonna be able to afford this when interest rates go up.

0:19:40.7 Mason Gates: Because yes, interest rates were extremely low in 2021, and I do think they will most likely go down slightly by 2026. But I don't think we're gonna get below five for a long time because historically speaking, where we're at interest rate wise right now isn't even that bad. We were just in a really, really good time. And I've looked at, there was a graph that came out recently, I can't remember what institution put it out, but they showed a graph of interest rates over the course of the last, I think it was 5000 years, dating even back to Roman Empire times. And this is the lowest they had ever been. And so I think that's very significant to take into account, just how good we had it as far as interest rates went, but now we're at a point where things are gonna change and people are gonna have to make decisions.

0:20:36.8 Frank Rolfe: Yeah, I totally agree. And Mason, I'm a huge history buff 'cause it seems that history always repeats itself. So I like to read books of different centuries. And I bought a book recently that was a book about real estate investing written in about, oh gosh, like 1890 or something. And back then obviously they had no calculators, they didn't even have slide rules. So you relied on printed things for numbers 'cause you couldn't do the calculations. So it had a glossary in the back of mortgage payments. So assuming that some guy in 1890 was buying a barn or a farm or something, and that's what people went by.

0:21:16.9 Frank Rolfe: And it was interesting that in the book they only gave you five interest rate ranges. The only interest rates that they had in the published mortgage table, which is this giant table at the back, like if you bought the book, one reason you bought the book was you get the mortgage table. It only showed interest rates as a five, a six, a seven, an eight or a nine because that's what it always was in America. I mean, back in the 1776 rates were at seven, and they've always just been in that very narrow range of five to 10. And so I think people got really mentally screwed up there during the Great Recession era and after with the government's attempt to keep them insanely low. But yeah, I don't see those coming back either. I think mortgage rates long-term will be like 5%, something like that...

0:22:08.3 Mason Gates: Right. Yeah, I agree.

0:22:09.0 Frank Rolfe: After that recession, we're never going back down to zero. That's nonsense. It's never gonna happen again.

0:22:13.8 Mason Gates: Yeah. [chuckle]

0:22:16.7 Frank Rolfe: Well, so Mason, let me ask you, obviously you're very approachable, very knowledgeable. If someone listens to this and says, "Hey, I wanna reach out to Mason and get his listings and get on his radar screen," how's the best way to reach you?

0:22:31.0 Mason Gates: Yeah, either phone or email. Email's preferable just because it shows me your name, all of your contact information, an overview of what you're looking for. But that being said, you can reach me via my direct and my email. My direct is 602-946-4856 and then my email is gonna be my first name. So [email protected]. And again, yeah, just send me an email, tell me a little bit about yourself, kind of your credibility, what you're looking to do, what you're looking to buy. And then as far as on the sell side of things, even if you're not looking to sell, I always tell owners that it's never a bad time to see where you fit in the market.

0:23:18.0 Mason Gates: I understand that 99% of people I talk to on the phone aren't gonna tell me, "Hey, I'm ready to sell today," but that being said, I'm more than happy to be able to provide you with knowledge and information about what I'm seeing in the market on a frequent basis. And especially use that information and that knowledge to underwrite your property, be able to give you information and tell you not only what the value of your property is, but where I think you can add value to it. Which long term obviously helps increase the value of it. So, yeah.

0:23:55.4 Frank Rolfe: That's all great stuff, Mason. Well again, we really appreciate you being here, a lot of good knowledge that you just gave us. And again, if anyone has any interest in learning about Mason's listings, future listings, just discussing the industry, reach out to Mason, you've got his contact information. And again, Mason, we appreciate you being here. That concludes this special report and we will talk to everyone again soon.

0:24:21.3 Mason Gates: Thanks. Really appreciate you having me.

0:24:23.8 Frank Rolfe: Thanks, Mason.