The word "brutal" probably best describes how 2020 was for mall real estate investment trust (REIT) Simon Property Group (SPG 0.27%). Although it survived the downturn better than most of its peers (some of which ended up in bankruptcy court), the company still ended up cutting its dividend by a painful 40%. Things are looking much brighter for the REIT these days, and the recovery looks like it has at least another year to run.

Culling out the weakest players

Leading up to the pandemic, mall REITs like Simon were contending with the so-called "retail apocalypse." In a broad sense, consumers were increasingly buying from online stores. But the problem was deeper than that because the retailers getting hit the hardest were those that didn't, or couldn't, adjust to changing consumer habits. Often that was because of heavy debt loads and bloated store counts. 

People walking with shopping bags in a mall.

Image source: Getty Images.

Throughout the industry, weaker companies were shutting down stores or simply going out of business. Compounding that issue were the stronger stores, which were also closing their weaker locations in an effort to focus on the stores with the best prospects. Malls in regions with lower population density and smaller average household incomes were struggling and, in some cases, being closed down. But this was all a slow-moving train wreck. 

The coronavirus pandemic in 2020 sped up the process dramatically. Without the ability to sell in physical locations for nameplates that were deemed nonessential, and thus shut down, businesses with too much leverage and a weak online presence went bankrupt. And the retailers that remained moved more quickly to shutter weak locations. Malls got hammered, noting that Simon, which has one of the best-located mall portfolios in the industry, had to cut its dividend. 

But the swiftness of the hit proved to be good for the mall industry since it weeded out the weakest retailers and malls. That, in turn, has set up a strong upturn for Simon's well-positioned malls as strong retailers, including previously online-only names, look to expand.

The good news keeps going

For a REIT, one of the best measurements of the business's success is the dividend. A growing dividend is only possible if the company is doing well. Simon has increased its dividend six times since the cut in 2020, raising the payout by nearly 40%. While it is still below where it was prior to the cut, the swift dividend turnaround is a clear indication that things are looking up.

That has shown up in the business in a number of ways, including rising occupancy rates, increasing sales per square foot, and strong leasing trends. The last one is, perhaps, the most important as investors look to the future.

During Simon's third-quarter 2022 conference call, management noted that the REIT signed over 3,100 leases during the first nine months of the year. Currently, the company has about 2 percentage points' worth of signed-not-opened (SNO) leases, which basically means the company has a tenant but it has to get the space ready before it can be occupied. It simply takes time to redevelop a retail space for a new customer, so there's no quick way to get all of those tenants into their spaces.

That's bad in one way, but good in another, if you are a dividend investor. Simon believes it will take all of 2023 and perhaps into 2024 before it gets its SNO leases down to more historical levels. As those spaces get filled up, they will start to generate cash flow for Simon over the next year or two. Increasing cash flow means the ability to pay more in dividends. So payout increases are highly likely to keep going unless there's another massive dislocation like the one seen in 2020. 

SPG Dividend Chart

SPG dividend; data by YCharts.

History doesn't repeat, but it often rhymes 

Not long after the 2007-09 Great Recession, Simon Property Group cut its dividend and then, very quickly, started to increase it again. In short order, the dividend was far above its pre-cut level.

While it is too soon to suggest an exact repeat of that pattern, what is clear is that the REIT is looking to grow the dividend today after a big dividend cut, just like it did the last time. And the fundamentals of the business suggest that's a sustainable trend. With a generous 6% or so dividend yield, income-focused investors should find Simon's story very attractive today.