At the end of March 2024, the Bank of Mexico (Banxico) reduced the Overnight Interbank Offered Rate (IBOR or TIIE) to 11% to stimulate investment and control inflation at the national level. Regardless of the repercussions on the economy and the commercial real estate market, this measure will impact the debt of the Real Estate Investment Trusts (REITs or FIBRAs), as about 33% of these companies' financial liabilities are variable or directly dependent on interest rate fluctuations.

According to data from SiiLA FIBRA Analytics, the variable debt of the 16 main FIBRAs in Mexico closed 2023 with a balance of 80,909 million pesos (up to 4,565 million dollars) and a financial expense associated with 5% of this amount, including interest on loans and charges or commissions related to maintaining their financial obligations. It is important to note that the quarterly financial expense of the FIBRAs is currently comparable to 22% of their total quarterly income, in a context where the quarterly financial expense over the last three years averaged 25% of their total income.

The reduction of the TIIE could not only alleviate part of the financial burden of the FIBRAs by decreasing the interest associated with their variable debt, which, as a proportion of their income, was reduced by 13% last year. It could also improve the profitability of the trusts and increase their attractiveness to investors, as by lowering financial expense as a percentage of total income, the FIBRAs would have a greater capacity to reinvest in their operations or distribute dividends to their shareholders.

The Impact of the TIIE on the Debt of the FIBRAs

Data from SiiLA indicates that 62% of the FIBRAs' variable debt is denominated in pesos. A part of this proportion, equivalent to 45,826 million pesos (around 2,585 million dollars) of variable rate debt based on the TIIE, which includes different spreads (from 0.9% to 4.3%) on the rate and maturity periods of 28 and 91 days, would be subject to direct benefits related to the reduction of the TIIE.

Companies such as FIBRA Educa and FIBRA Storage have practically all their variable debt based on the TIIE. Others, such as FIBRA Shop, FIBRA Uno, FIBRA Plus, FIBRA Inn, FIBRA Soma, and FIBRA Hotel, have between 56% and 86%. The rest have levels below 1%.

The reduction of the TIIE could, therefore, offer significant relief for the FIBRAs by decreasing the cost associated with this segment of their debt. However, it is essential to highlight that the variable debt in the case of the FIBRAs is not limited solely to instruments directly indexed to the TIIE but can also include other forms of variable debt, such as those indexed to floating rates based on different references. Although not directly benefiting from the reduction of the TIIE, these types of debt can be indirectly affected by the variations of this rate, as the TIIE is a key reference for interest rates in the Mexican financial market.

For example, a part of the FIBRAs' variable debt may be subject to instruments such as interest rate swaps, where a fixed rate is exchanged for a variable rate. In these cases, a reduction in the TIIE could indirectly impact the cost of these instruments and, therefore, the FIBRAs' financial expense. However, FIBRAs generally make swaps from variable to fixed rates, as in recent cases of FIBRA Macquarie (2023) and FIBRA Uno (2020).

Overall, Banxico's decision to reduce the TIIE to 11% presents an opportunity for the FIBRAs to optimize their debt structure and improve their financial position. For more information about the FIBRAs' performance, explore SiiLA REsource or contact us at contacto@siila.com.mx.