Last year, many investors believed that the COVID-19 pandemic would deal a death blow to U.S. malls. However, mall traffic has come roaring back in 2021, as consumers proved eager to return to in-person experiences once they had received their coronavirus vaccines.

Even a summer surge in COVID-19 cases couldn't break malls' momentum. On Monday afternoon, Simon Property Group (SPG 0.28%) reported another big earnings beat and raised its quarterly dividend for the third time this year.

Another step forward

Simon Property Group's strong recovery continued last quarter. Funds from operations (FFO) reached $3.13 per share: up 53% year over year and up 3% compared to the third quarter of 2019.

To be fair, Simon's Q3 results did include a gain of $0.30 per share from exchanging the company's interests in licensing joint ventures for Forever 21 and Brooks Brothers for a greater stake in joint-venture partner Authentic Brands Group.

Excluding this special item and a separate $0.08-per-share debt extinguishment charge, Simon Property Group posted adjusted FFO per share of $2.91, crushing the analyst consensus of $2.53. This was down from $3.05 two years earlier and essentially in line with its adjusted FFO per share of $2.92 in the second quarter. Management also lifted its full-year FFO guidance to a range of $11.55 to $11.65 per share: $0.85 higher than its previous outlook.

The underlying trends for Simon's properties continue to improve, too. Occupancy for its domestic segment reached 92.8% as of Sept. 30: up from 91.8% three months earlier, albeit still below the mall REIT's 94.7% occupancy rate two years ago. Furthermore, tenant sales increased 11% compared to Q3 2019 last quarter, which could support future rent increases.

Three people walking through a mall holding shopping bags.

Image source: Getty Images.

Rewarding shareholders again

Simon Property Group cut its quarterly dividend from $2.10 per share to $1.30 per share early in the pandemic. However, as business has come roaring back in 2021, Simon has repeatedly increased its shareholder payouts.

In June, the REIT said that it would raise its dividend to $1.40 per share for the second quarter. Just six weeks later, it raised its quarterly dividend to $1.50 per share for the third quarter. And on Monday, Simon announced a third consecutive dividend hike, bringing its fourth-quarter payout to $1.65 per share.

Even after the most recent increase, Simon Property Group has a very reasonable payout ratio of less than 60% of its Q3 adjusted FFO. That leaves room for additional dividend growth over the next few years if FFO continues to rise.

More upside despite a big rally

Simon Property Group shares jumped more than 6% on Tuesday, as investors reacted favorably to the earnings report. The stock has now surged 23% since the beginning of October and sits at a 52-week high.

SPG Chart

Simon Property Group stock performance, data by YCharts.

If Simon can boost FFO beyond pre-pandemic levels over the next few years, there could be plenty more upside for investors. After all, the stock still trades for less than 14 times the company's updated full-year FFO guidance.

To be fair, one-time special items are set to boost Simon's 2021 FFO by about 5%. Additionally, the REIT has recorded year-to-date net operating income of $340 million from its retail investments. Depending on how those retail operations perform in the fourth quarter, they could potentially contribute over $1 per share of FFO this year. While Simon's management expects to continue reaping big profits from those investments, shareholders can't necessarily count on that, given the volatility of the retail industry.

Even if income from Simon's retail investments moderates going forward, the upside from returning to full occupancy at its malls, raising rents, and completing redevelopment projects should be enough to drive FFO growth. That makes Simon Property Group stock a reasonable pick for investors looking to bet that brick-and-mortar retail will continue to recover.