Simon Property Group (NYSE:SPG) is one of the largest mall landlords in the world, which was a terrible place to be in 2020 when the pandemic hit. But as the end of 2021 approaches, things are starting to look very different. Here's why and what that could mean for the final quarter of the year.

A little ugly history

Although this is something of a well-trodden story at this point, 2020 was ugly for a lot of companies because of the coronavirus pandemic. Simon owns about 200 or so enclosed malls and outlet centers, which put it at the center of the storm. When governments around the world effectively shut their economies down to help slow the spread of COVID-19, traffic and sales at Simon's properties fell off a cliff. In fact, many of its malls were simply closed because they were considered nonessential businesses.

Teens with shopping bags walking on a street.

Image source: Getty Images.

It was not a pretty period, with tenants quickly asking the mall real estate investment trust (REIT) for rent concessions or, worse, simply not paying at all. Simon even had to take some large, financially strong tenants to court to get them to start paying again.

However, that was the exception and not the norm. Although negotiations weren't easy, Simon worked with its tenants to give them the rent leeway they needed in the short term while ensuring that it retained long-term upside potential.

Essentially, Simon traded off basic rent payments for higher percentage-of-sales rent payments. The tenants got the break they needed while the pandemic was raging, and Simon was in line to benefit along with the retailers when customers eventually returned to their stores. This deal hurt Simon in 2020, when it was forced to cut its dividend, but in 2021 things have gotten much better.

A little happy math

The first thing to note is that Simon increased its dividend three times in 2021. Although the dividend isn't back to the level it was before the cut, the company is clearly seeing improvement in its business. Helping that along has been its percent-of-sales rent payments. 

To put a number on that, in the third quarter, average base rent was $53.91 per square foot. That was down from $56.13 in the third quarter of 2020. That seems pretty bad, but those numbers exclude percentage-of-sales rent payments. In the third quarter, these payments would have added another $7 per square foot (or a huge 12.5% increase), Chief Executive Officer David Simon said during the company's third-quarter 2021 earnings conference call.

That would have turned the quarter's $53.91 per square foot into $60.91, which changes the math entirely. To be fair, he didn't note what the percentage-of-sales rent figure was in the third quarter of 2020, but given the retail backdrop, it's fair to assume the number was much, much smaller.

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Now, with the holiday shopping season in full swing, Simon is set to benefit as consumers start shopping again -- this time in person. To be fair, foot traffic may not be as great as it was before the pandemic, especially as yet another coronavirus variant makes headlines. But one thing that has been clear since malls have reopened is that people are coming to shop. Although customer traffic has been recovering more slowly than sales, those who are showing up are buying more.

And as long as consumers are coming to the malls and spending, Simon will benefit right along with its tenants. That means that the fourth quarter, assuming no major pandemic-related disruptions, could be a great one for this mall landlord.

On the mend

Simon's business has clearly turned an important corner, and the deals it made with struggling tenants are helping fuel an impressive rebound. Investors have taken note, and the stock's gain of more than 80% this year dwarfs the S&P 500's 23% rise. But the positives aren't over yet. Indeed, look for this giant mall REIT to post another quarter of strong results as it closes out 2021. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.