Results of Operations

Comparison of the three months ended September 30, 2002 to the three months ended September 30, 2001.

Income increased $13.9 million, or 83.9%, to $30.5 million for the three months ended September 30, 2002, from $16.6 million for the three months ended September 30, 2001. This increase was primarily the result of the acquisition of the 31 retail centers on September 25, 2001, the acquisition of one center in April 2002, the buyout and consolidation of five centers previously held as unconsolidated investments, a gain resulting from the partial sale of an unconsolidated investment, and higher rents on releasing and renewals during 2002, partially offset by higher interest costs and increased losses from Chelsea Interactive.

Base rentals increased $16.4 million, or 53.9%, to $46.9 million for the three months ended September 30, 2002, from $30.5 million for the three months ended September 30, 2001, due to the acquisition of the 32 retail centers and the buyouts of ownership interests in five centers in 2002, higher average rents on releasing and renewals and the expansion of a center in late 2001.

Percentage rents increased $1.3 million, or 33.3%, to $5.4 million for the three months ended September 30, 2002, from $4.1 million for the three months ended September 30, 2001, primarily due to higher tenant sales, the acquisition of the 32 retail centers and the buyouts of ownership interests in five centers during 2002.

Expense reimbursements, representing contractual recoveries from tenants of certain common area maintenance, operating, real estate tax, promotional and management expenses, increased $4.5 million, or 39.3%, to $16.1 million for the three months ended September 30, 2002, from $11.6 million for the three months ended September 30, 2001, due to the recovery of operating and maintenance costs from increased GLA. The average recovery of reimbursable expenses for the Premium Properties was 89.9% for the three months ended September 30, 2002 compared to 90.6% for the three months ended September 30, 2001. The average recovery of reimbursable expenses for the Other Properties was 57.7% for the three months ended September 30, 2002.

Other income increased $0.1 million, to $3.0 million for the three months ended September 30, 2002, from $2.9 million for the three months ended September 30, 2001, primarily due to increased ancillary operating income from the acquisition of the 32 new retail centers and the buyouts of ownership interests in five centers in 2002 partially offset by decreased interest income from lower interest rates and the sale of an outparcel during 2001.

Operating and maintenance expenses increased $6.6 million, or 51.7%, to $19.4 million for the three months ended September 30, 2002, from $12.8 million for the three months ended September 30, 2001. The increase was primarily due to costs related to increased GLA and the buyouts of ownership interests in five centers during 2002.

Depreciation and amortization expense increased $2.8 million, or 23.6%, to $15.0 million for the three months ended September 30, 2002, from $12.2 million for the three months ended September 30, 2001. The increase was due to additional depreciation of the acquisition of the 32 retail centers, the buyouts of ownership interests during 2002 and expansions.

General and administrative expense increased $1.0 million, to $1.6 million for the three months ended September 30, 2002, from $0.6 million for the three months ended September 30, 2001, primarily due to increased unit program accrual and professional fees.

Other expenses increased $0.5 million, to $1.0 million for the three months ended September 30, 2002, from $0.5 million for the three months ended September 30, 2001, due to ground lease expenses assumed with the acquisition of the 31 retail centers, legal expenses and increased reserve for bad debt.

Income from unconsolidated investments decreased $2.0 million, to $2.0 million for the three months ended September 30, 2002, from $4.0 million for the three months ended September 30, 2001, due to the buyouts of ownership interests in five centers which were previously held as unconsolidated investments partially offset by higher earnings from Chelsea Japan.

The loss from Chelsea Interactive increased $2.3 million, or 156.6%, to $3.8 million for the three months ended September 30, 2002, from $1.5 million for the three months ended September 30, 2001. The increase was due to increased payroll, general and administrative, depreciation and amortization expense and lack of third party participation in the losses.

Gain on sale of unconsolidated investment of $10.9 million for the three months ended September 30, 2002 resulted from the sale of approximately 40% of the OP's partial interest in Value Retail.

Interest in excess of amounts capitalized increased $4.2 million, or 47.3%, to $13.1 million for the three months ended September 30, 2002, from $8.9 million for the three months ended September 30, 2001, due to higher debt balances from acquisitions, debt assumption in the F/C buyout and bond issue partially offset by lower interest rates.

Comparison of the nine months ended September 30, 2002 to the nine months ended September 30, 2001.

Income increased $21.5 million, or 49.9%, to $64.7 million for the nine months ended September 30, 2002, from $43.2 million for the nine months ended September 30, 2001. This increase was primarily the result of the acquisition of the 31 retail centers on September 25, 2001, the acquisition of one center in April 2002, the buyout and consolidation of five centers previously held as unconsolidated investments, a gain resulting from the partial sale of an unconsolidated investment, and higher rents on releasing and renewals during 2002, partially offset by higher interest costs and increased losses from Chelsea Interactive.

Base rentals increased $40.9 million, or 46.5%, to $128.8 million for the nine months ended September 30, 2002, from $87.9 million for the nine months ended September 30, 2001, due to the acquisition of the 32 retail centers and the buyouts of ownership interests in five centers in 2002 and higher average rents on new leases and renewals.

Percentage rents increased $3.1 million or 31.5% to $13.0 million for the nine months ended September 30, 2002, from $9.9 million for the nine months ended September 30, 2001, primarily due to higher tenant sales, acquisition of the 32 retail centers and the buyouts of ownership interests in five centers during 2002.

Expense reimbursements, representing contractual recoveries from tenants of certain common area maintenance, operating, real estate tax, promotional and management expenses, increased $9.3 million, or 27.2%, to $43.3 million for the nine months ended September 30, 2002, from $34.0 million for the nine months ended September 30, 2001, due to the recovery of operating and maintenance costs from increased GLA. The average recovery of reimbursable expenses for the Premium Properties was 88.4% for the nine months ended September 30, 2002, compared to 90.7% for the nine months ended September 30, 2001. The average recovery of reimbursable expense for the Other Properties was 55.1% for the nine months ended September 30, 2002.

Other income decreased $0.2 million, to $8.2 million for the nine months ended September 30, 2002, from $8.4 million for the nine months ended September 30, 2001. The decrease is primarily the result of decreased interest income from lower interest rates and the sale of an outparcel in 2001 partially offset by an increase in ancillary income related to the acquisition of the 32 new retail centers and the buyouts of ownership interests in five centers during 2002.

Operating and maintenance expenses increased $16.3 million, or 43.4%, to $53.8 million for the nine months ended September 30, 2002, from $37.5 million for the nine months ended September 30, 2001. The increase was primarily due to costs related to increased GLA, and the buyouts of ownership interests in five centers during 2002.

Depreciation and amortization expense increased $6.7 million, or 19.0%, to $42.2 million for the nine months ended September 30, 2002, from $35.5 million for the nine months ended September 30, 2001. The increase was due to additional depreciation of the acquisition of the 32 retail centers and the buyouts of ownership interests in five centers during 2002 and expansions.

General and administrative expense increased $1.9 million, or 63.6%, to $5.0 million for the nine months ended September 30, 2002, from $3.1 million for the nine months ended September 30, 2001, primarily due to increased head count, accrual for unit program and professional fees.

Other expenses increased $1.5 million, or 88.0%, to $3.2 million for the nine months ended September 30, 2002, from $1.7 million for the nine months ended September 30, 2001. The increase was primarily due to ground lease expenses assumed with the acquisition of the 31 retail centers, legal expenses and increased reserve for bad debt.

Income from unconsolidated investments decreased $1.7 million, to $8.8 million for the nine months ended September 30, 2002, from $10.5 million for the nine months ended September 30, 2001, due to the buyouts of ownership interests in five centers which were previously held as unconsolidated investments, offset by increased earnings from Chelsea Japan, including a one time leasing fee of $0.2 million from Rinku phase two.

The loss from Chelsea Interactive increased $6.8 million, or 197.8%, to $10.2 million for the nine months ended September 30, 2002, from $3.4 million for the nine months ended September 30, 2001, due to increased depreciation, administrative and maintenance expenses and lack of third party participation in the losses.

Gain on sale of unconsolidated investment of $10.9 million for the nine months ended September 30, 2002 resulted from the sale of approximately 40% of the OP's interest in Value Retail.

Interest in excess of amounts capitalized increased $7.4 million, or 28.0%, to $33.7 million for the nine months ended September 30, 2002, from $26.3 million for the nine months ended September 30, 2001, primarily due to higher debt balances from acquisitions, debt assumption in the F/C buyout, lower construction activity and new bond issue partially offset by lower interest rates.

Liquidity and Capital Resources

The OP believes it has adequate financial resources to fund operating expenses, distributions, and planned development, construction and acquisition activities over the short term, which is less than 12 months and the long term, which is 12 months or more. Operating cash flow in 2001 of $121.7 million is expected to increase with a full year of operations of the 4.4 million square feet of GLA added during 2001, the acquisition of one center, the buyouts of ownership interests in five centers and scheduled openings of approximately 127,000 square feet of GLA in 2002. The OP has adequate funding sources to complete and open all planned acquisition or development projects, fund committed amounts for Chelsea Interactive and the Simon-Ventures and to acquire six centers for $282.5 million that are expected to close during the fourth quarter 2002. These transactions are expected to be accomplished with available cash of $13.7 million and $108 million available under the increased Senior Credit Facility, additional bank borrowings, issuing OP units or accessing the public markets through the Company's $350 million debt shelf registration and its $185 million equity shelf registration.

Operating cash flow is expected to provide sufficient funds for dividends and distributions in accordance with REIT federal income tax requirements. In addition, the OP anticipates retaining sufficient operating cash to fund re-tenanting and lease renewal tenant improvement costs, as well as capital expenditures to maintain the quality of its centers, and meet funding requirements for Chelsea Interactive.

Common distributions declared and recorded during the nine months ended September 30, 2002, were $60.7 million, or $1.38 per share or unit. The OP's common dividend payout ratio as a percentage of net income before depreciation and amortization (exclusive of amortization of deferred financing costs ("FFO")) was 66.8% for the nine months ended September 30, 2002. The Senior Credit Facility limits aggregate dividends and distributions to the lesser of (i) 90% of FFO on an annual basis or (ii) 100% of FFO for any two consecutive quarters.

At September 30, 2002, the OP had a $200.0 million senior unsecured revolving bank line of credit, (the "Senior Credit Facility"). Under the terms, the Senior Credit Facility's expiration is March 31, 2005, and the OP has the right to extend the maturity date until March 31, 2006. The Senior Credit Facility bears interest on the outstanding balance, payable monthly, at a rate equal to the London Interbank Offered Rate ("LIBOR") plus 1.05% (2.88% at September 30, 2002) or the prime rate, at the OP's option. The LIBOR rate spread ranges from 0.85% to 1.50% depending on the OP's Senior Debt rating. A facility fee of 0.125% on the Senior Credit Facility is payable annually in advance. $108.0 million of the Senior Credit Facility was available at September 30, 2002.

On August 20, 2002, the OP became the sole owner of the four premium outlets held in the F/C joint venture by acquiring Fortress' 51% undivided ownership interest for $58.9 million in cash which was funded by borrowing from the Senior Credit Facility.

On June 18, 2002, the OP completed a $100 million debt offering consisting of $100 million of 6.875% unsecured term notes due June 2012 that were priced to yield 6.90% to investors. Proceeds were used to repay borrowings under the Allen Premium Outlets and OPO construction loans that were to mature in February 2003 and August 2002, respectively, and for general corporate purposes.

On April 1, 2002, the OP acquired a 305,000 square foot center located in Edinburgh, Indiana for $27.0 million in cash. The center is located 40 miles south of downtown Indianapolis and was 98% leased at the acquisition date. The OP funded the transaction from available cash and the Senior Credit Facility. Also on April 1, 2002, the OP became the sole owner of the Orlando Premium Outlets by acquiring Simon's 50% undivided ownership interest for $46.6 million in cash and the assumption of $29.7 million of existing mortgage debt and the guarantee related thereto. The cash portion of the transaction was funded by borrowing from the Senior Credit Facility. On June 16, 2002, the OP repaid the outstanding balance of $59.4 million and extinguished the mortgage.

During 2002 the Company redeemed and retired 136,500 shares of 8.375% Series A Cumulative Redeemable Preferred Stock at $47 per share and 66,552 shares at $47.25 per share using available cash.

During June and July 2002, the OP sold four Other Properties and two outparcels generating net proceeds of approximately $6.8 million, which approximated the net book value of the properties. Accordingly, no gain or loss on these sales was recognized.

Development activity for real estate operations as of September 30, 2002 includes additional phases of two existing centers, totaling 47,000 square feet scheduled to open in late 2002. Construction is also underway on the 50% joint venture project outside Las Vegas, Nevada scheduled to open in summer 2003, the 175,000 square-foot second phase of Gotemba Premium Outlets scheduled to open mid–2003, and the 50% joint venture project in Chicago, Illinois, scheduled to open in mid 2004; development is underway on a project in Seattle, Washington scheduled to open in 2005 and a project north of Tokyo, Japan scheduled to open in mid-2003. These projects are under development and there can be no assurance that they will be completed or opened, or that there will not be delays in opening or completion. All current development activity will be financed either through project specific secured construction financing, the yen denominated line of credit, available cash or through the Senior Credit Facility. The OP will seek to obtain permanent financing once the projects are completed and income has been stabilized.

On May 15, 2002, the OP entered into a 50/50 joint venture agreement with Sordo Madaleno y Asociados and Mr. Carlos Peralta of Mexico City to jointly develop premium outlet centers in Mexico. Subject to entitlements, site work for the 200,000 square-foot first phase of the outlet project is scheduled to commence later in the year, with construction to begin shortly thereafter. Phase I is expected to open in 2004. The site can support a second phase containing approximately 175,000 square feet of GLA. To date, the OP has committed $3.0 million to the joint venture.

In connection with the Simon-Ventures, the OP has committed to provide 50% of the development costs of the centers, which are expected to be approximately $48.0 million to Simon-Las Vegas and $46.0 million to Simon-Chicago. As of September 30, 2002, the OP had contributed $17.3 million to Simon-Las Vegas and $7.1 million to Simon-Chicago.

The OP has minority interests ranging from 3% to 8% in several outlet centers and outlet development projects in Europe operated by Value Retail. The OP's total investment in Europe as of September 30, 2002 was $3.6 million. The OP has also agreed to provide up to $22.0 million in limited debt service guarantees under a standby facility for loans arranged by Value Retail to construct outlet centers in Europe. The term of the standby facility for new guarantees expired in November 2001 and these guarantees shall not be outstanding for longer than five years after project completion. In July 2002, the OP sold approximately 40% of its holdings in Value Retail to a third party for $11.4 million that resulted in a gain of approximately $10.9 million.

In June 1999, the OP entered into an agreement with Mitsubishi Estate Co., Ltd. and Nissho Iwai Corporation to jointly develop, own and operate premium outlet centers in Japan. The joint venture is known as Chelsea Japan Co., Ltd. ("Chelsea Japan").

Borrowings related to Chelsea Japan for which the OP and the Company have provided guarantees as of September 30, 2002, are as follows (in thousands):

   Total Facility                 |                     Outstanding
                                  |
  Yen            US $ Equivalent  |     Yen        US $ Equivalent    US $ Guarantee    Due Date    Interest Rate
  ---            ---------------  |     ---        ---------------    --------------    --------    -------------
4.0 billion (1)   $32.8 million   |  1.0 billion    $8.5 million       $8.5 million       2003        1.46%
3.8 billion (2)    31.2 million   |  3.7 billion    30.0 million       12.0 million       2015        2.20%
0.6 billion (2)     4.9 million   |  0.6 billion     4.9 million        2.0 million       2012        1.50%

The OP has developed an e-commerce venture through its affiliate, Chelsea Interactive. The Board of Directors has approved a funding commitment of up to $60.0 million. As of September 30, 2002, the OP has funded $51.6 million and anticipates that the balance of the funding will be used for development and operating cash shortfalls. The net book value of the OP's investment as of September 30, 2002 was $35.0 million. While management currently believes that it is possible to recover the net book value of the investment through future cash flows if revenues from existing brands improve and/or additional brands are secured, there is substantial risk that Chelsea Interactive will not: (1) generate sufficient future revenues for the OP to recover its investment; (2) achieve positive cash flow before reaching the OP's committed funding of $60.0 million; (3) successfully complete a satisfactory arrangement with a financial/technology investor; or (4) continue as a going concern. As a result of these risk factors, management may at any time determine that it is necessary to significantly write down or write off the OP's $35.0 million investment. The OP is actively pursuing and negotiating with potential investors to provide capital and further develop the business.

To achieve planned growth and favorable returns in both the short and long-term, the OP's financing strategy is to maintain a strong, flexible financial position by: (i) maintaining a conservative level of leverage; (ii) extending and sequencing debt maturity dates; (iii) managing exposure to floating interest rates; and (iv) maintaining liquidity. Management believes these strategies will enable the OP to access a broad array of capital sources, including bank or institutional borrowings and secured and unsecured debt and equity offerings, subject to market conditions.

The OP's cash balances decreased $10.9 million to $13.7 million at September 30, 2002 from $24.6 million at December 31, 2001. Net cash provided by operating activities increased $2.5 million for the nine months ended September 30, 2002, compared to the corresponding 2001 period. The increase was primarily due to the increased operating cash flow generated from the growth of the OP's GLA substantially offset by the payout of the deferred incentive compensation in March 2002. Net cash used in investing activities increased $33.7 million for the nine months ended September 30, 2002, compared to the corresponding 2001 period. The increase was primarily due to the acquisition of one center and the buyout of ownership interests in five centers partially offset by proceeds from sale of an unconsolidated investment. Net cash provided by financing activities increased by $22.0 million compared to the corresponding period in 2001. The increase was primarily due to increased debt issuance, partially offset by decreased offerings of the Company's common stock and retirements of the Company's preferred stock.

Funds from Operations

Management believes that FFO should be considered in conjunction with net income, as presented in the statements of operations included elsewhere herein, to facilitate a clearer understanding of the operating results of the OP. The White Paper on FFO approved by the Board of Governors of NAREIT in October 1999 defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. The OP believes that FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the OP to incur and service debt, to make capital expenditures and to fund other cash needs. The OP computes FFO in accordance with the current standards established by NAREIT which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the OP. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the OP's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the OP's liquidity, nor is it indicative of funds available to fund the OP's cash needs, including its ability to make cash distributions.

                                                         Three Months Ended            Nine Months Ended
                                                           September 30,                 September 30,
                                                            2002         2001          2002           2001
                                                        -------------  -----------   -----------  -------------

Net income to common unitholders......................   $28,228      $14,093         $57,739        $35,645
Add (deduct):
Depreciation and amortization - wholly owned..........    15,045       12,174          42,229         35,479
Depreciation and amortization - joint ventures........       871        1,628           3,673          4,700
Amortization of deferred financing costs and
    depreciation of non-rental real estate assets.....      (573)        (480)         (1,741)        (1,326)
Gain on sale of unconsolidated investment.............   (10,911)           -         (10,911)             -
                                                        ------------  -----------   ------------  ------------
FFO...................................................   $32,660      $27,415         $90,989        $74,498
                                                        ===========   =============   ============  ============
Average units outstanding (1).........................    45,883       40,630          45,538         39,912
Dividends declared per share..........................    $0.485        $0.39          $1.375          $1.17

(1) Assumes May 28, 2002, 2-for-1 stock/unit split had occurred on January 1, 2001.

Recent Accounting Pronouncements

In October 2001, the FASB issued Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard harmonizes the accounting for impaired assets and resolves some of the implementation issues as originally described in SFAS 121. The new standard became effective and was adopted by the OP on January 1, 2002. The adoption of this pronouncement has not had a material impact on the OP's results of operations or financial position.

In May 2002, the FASB issued SFAS No. 145, "Reporting Gains and Losses from Extinguishment of Debt", which rescinded SFAS No. 4, No. 44 and No. 64 and amended SFAS No. 13. The new standard addresses the income statement classification of gains or losses from the extinguishment of debt and criteria for classification as extraordinary items. The new standard became effective for fiscal years beginning after May 15, 2002. The OP adopted this pronouncement on April 1, 2002. The adoption of this pronouncement did not have a material impact on the OP's results of operations or financial position.

Critical Accounting Policies and Estimates

The OP's discussion and analysis of its financial condition and results of operations are based upon the OP's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the OP to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The OP bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The OP believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Bad Debt

The OP maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its tenants to make required rent payments. If the financial condition of the OP's tenants were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Foreign Exchange Exposure

From time to time, the OP may enter into hedging contracts to protect against fluctuations in foreign exchange rates. Receivables from Chelsea Japan are recorded in the accompanying financial statements at the exchange rate on the date of valuation. Significant changes in the exchange rate may result in changes to the receivable realized.

Valuation of Investments

The OP reviews its investments in unconsolidated affiliates for impairment wherever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

Economic Conditions

Substantially all leases contain provisions, including escalations of base rents and percentage rentals calculated on gross sales, to mitigate the impact of inflation. Inflationary increases in common area maintenance and real estate tax expenses are substantially all reimbursed by tenants.

Virtually all tenants have met their lease obligations and the OP continues to attract and retain quality tenants. The OP intends to reduce operating and leasing risks by continually improving its tenant mix, rental rates and lease terms, and by pursuing contracts with creditworthy upscale and national brand-name tenants.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The OP is exposed to changes in interest rates primarily from its floating rate debt arrangements. In December 2000, the OP implemented a policy to protect against interest rate and foreign exchange risk. The OP's primary strategy is to protect against this risk by using derivative transactions as appropriate to minimize the variability that floating rate interest and foreign currency fluctuations could have on cash flow. In December 2000, a wholly-owned subsidiary of the OP entered into an interest rate swap agreement effective January 2, 2001 with a financial institution for a notional amount of $69.3 million amortizing to $64.1 million to hedge against unfavorable fluctuations in the LIBOR rates of its secured mortgage loan facility. The hedge effectively produces a fixed interest rate of 7.2625% on the notional amount until January 1, 2006.

At September 30, 2002 a hypothetical 100 basis point adverse move (increase) in U.S. Treasury and LIBOR rates applied to unhedged debt would adversely affect the OP's annual interest cost by approximately $1.0 million annually.

Following is a summary of the OP's debt obligations at September 30, 2002 (in thousands):

                                                      Expected Maturity Date
                        2002     2003     2004     2005       2006     Thereafter    Total       Fair Value
                       -------- ------   -------- --------- -------- ------------- ----------    -----------
Fixed Rate Debt            -        -        -     49,915        -     662,909       712,824        727,719
Average Interest Rate      -        -        -     8.38%         -        7.50%         7.56%             -
Variable Rate Debt         -        -        -     97,035        -      67,500       164,535        164,535
Average Interest Rate      -        -        -     2.88%         -        3.32%         3.06%             -

Item 4. Controls and Procedures

The Company's chief executive officer and chief financial officer, based on their evaluation of the OP's disclosure controls and procedures within the past 90 days, have concluded that such disclosure controls and procedures were effective to ensure that material information relating to the OP and required to be disclosed by the OP has been made known to them and has been recorded, processed, summarized and reported timely. There have not been any significant changes in the OP's internal controls or in other factors that could significantly affect these controls subsequent to the date of evaluation.