The coronavirus pandemic was a huge headwind for companies that focus on physical retail assets. That includes retailers and their landlords, with mall-owning real estate investment trusts (REITs) like Simon Property Group (SPG -1.40%) feeling material financial pain. But as 2021 gets underway, investors are betting that Simon's future has brightened. Here's why, and why the trend is likely to continue.

Down but not out

In an effort to slow the spread of the coronavirus, governments around the world ordered non-essential businesses to shut down. Going to a mall is pretty non-essential, so business ground to a halt, setting up a situation in which many retailers couldn't -- or chose not to -- pay rent to the real estate investment trusts that owned the properties they operated in. It wasn't a pleasant period, and given the uncertainty around the novel illness, investors chose to sell mall REITs like Simon Property Group. 

People walking in a busy enclosed mall.

Image source: Getty Images.

However, 2021 has seen a material change in direction, with Simon's stock up by more than a third. That said, it is still down around 20% from its 2020 highs (before the pandemic), so the stock hasn't fully recovered just yet. And there are signs that there's more room to run.

The biggest indicator is the expanding distribution of vaccines, which in some states are now being given to anyone over the age of 16. The world can move back to some semblance of normal as more people get vaccinated. With around 330,000 million people in the United States and only 10% or so fully vaccinated, there's a lot more room to go. And that will bring more people out to shop again, even in enclosed malls. 

The real reason to be excited

That said, more vaccinated citizens aren't the real reason why Simon's business is likely to continue to improve. The real reason is even more fundamental: Humans are social beings, and shopping is one of the key ways humans socialize. 

For example, mall peer Tanger Factory Outlet Centers (SKT -1.07%) tracks and reports foot traffic trends at its collection of largely outdoor centers. To be fair, outdoor structures allow airflow and are likely seen as safer than indoor structures. But in the fourth quarter of 2020, even as coronavirus cases were spiking, Tanger's traffic hit 90% of the levels seen in 2019. In January the REIT reported that foot traffic reached 99% of previous-year levels. Around half of Simon's malls are outlet centers, so this tailwind is likely helping to support its business, too. 

When asked about foot traffic during Simon's 2020 fourth-quarter earnings conference call, CEO David Simon highlighted Florida and Texas as examples where he's starting to see "green shoots" as the economies "get on with business." That's not as specific as Tanger's update, but it is in the same direction and includes the company's enclosed mall portfolio in the mix. Basically, once restrictions end, people are highly likely to start going back to the mall. 

At this point, Simon is calling for 2021 funds from operations (FFO) to be between $9.50 and $9.75 per share. In 2020 FFO was $9.11 per share, so the REIT is looking for a full-year improvement of 4% to 7%, which isn't exactly huge. But it would mark an important directional shift back toward growth. It also highlights another important factor: Simon has the financial strength to get through this rough patch. 

SPG Financial Debt to Equity (Quarterly) Chart

SPG Financial Debt to Equity (Quarterly) data by YCharts

That hasn't been true of all of its competitors, with CBL & Associates and Penn REIT filing for Chapter 11 bankruptcy protection in late 2020. Simon, for its part, has among the lowest financial-debt-to-equity ratios in the industry, meaning its balance sheet is in relatively strong shape despite the difficulties. In fact, the REIT has been taking advantage of the downturn to strengthen its business, buying a competitor and investing, with partners, in select retailers. These moves could help it come out the other side of the pandemic an even stronger competitor. But that will only be possible because Simon meets a need, and that need is social interaction via shopping. 

Now what

Simon Property Group is not for the faint of heart. Indeed, running a mall is a complex and expensive business, and the coronavirus is still very much an issue. Wall Street has boosted the stock, but there's still a lot of work to be done before Simon's business is back to normal.

However, for more aggressive types, this REIT could be an interesting long-term play. After the deep 2008-09 recession, which necessitated a dividend cut, Simon rebounded strongly, and aggressively hiked its dividend. If this downturn, which also necessitated a dividend cut, is similar, Simon Property Group could have an appealing future ahead for those willing to stick around and wait for consumers to get back to shopping -- which history and current trends suggest is likely.