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BIRMINGHAM, AL-Locally based Colonial Properties is acquiring Cornerstone Realty Income Trust in a $1.5-billion merger the two REITs say will create a $5-billion enterprise with one of the largest Sunbelt-focused multifamily platforms. Colonial owns 23,786 multifamily units and 6.7 million sf of office and retail properties concentrated primarily in Alabama, Georgia and Florida. Cornerstone owns and manages 87 multifamily properties comprising 22,910 units concentrated primarily in Dallas/Fort Worth, Charlotte and Atlanta. “At the beginning of the year we discussed our intention to rebalance our portfolio, which was weighted toward retail shopping centers and malls, into the multifamily sector,” said Colonial CEO Thomas Lowder in a Monday morning conference call. “We believe the apartment sector offers upside opportunities as it begins to recover, and that now is an excellent time to increase our capital investment in this sector.”According to the merger agreement, Colonial will pay $10.80 per share for all of the outstanding common stock and preferred units of Cornerstone. The price represents a 7.2% premium to Cornerstone’s closing share price on Oct. 22, 2004. As part of the transaction Cornerstone chief executive Glade Knight will join the Colonial Properties board of directors.Lowder said the acquisition achieves three primary corporate objectives: significantly increasing its multifamily portfolio; diversifying its Net Operating Income stream geographically; and, further expanding the company’s presence in high growth metropolitan statistical areas. In the investor conference call Monday morning, Lowder said Colonial’s post-merger multifamily portfolio should generate over 50% of the company’s 2005 pro forma NOI versus approximately 29% in 2004. Moreover, Lowder said no single state will account for more than 27% of the company’s 2005 pro forma NOI, which compares to approximately 42% in 2004.The transaction, which has been approved by both boards but now needs shareholder approval, will be structured as a common and preferred stock election merger, with Cornerstone shareholders having the right to elect to receive the merger consideration in Colonial Properties common or preferred depositary shares, subject to the restriction that the preferred depositary shares issued shall not exceed 25% of the total merger consideration. Depending upon the shareholder’s election, Colonial Properties expects to issue approximately 11 to 14 million shares of new common stock and up to approximately $150 million of new preferred securities and refinance or assume approximately $850 million of Cornerstone’s existing secured debt. The merger agreement provides that Cornerstone shareholders who elect to receive common stock will receive 0.2584 Colonial Properties shares for each Cornerstone share. Cornerstone shareholders who elect to receive redeemable preferred depositary shares will receive 0.4200 shares of $25 liquidation preference redeemable Series E Preferred Depositary Shares with a dividend rate of 7.62%, which will be listed on the NYSE. Cornerstone will have the right to terminate the transaction if Colonial Properties’ average share price for the 20 days preceding 10 days prior to the close of the transaction is below $31.00. However, in the event Colonial Properties’ share price is below such level, Colonial Properties has the right to continue the transaction through the payment, at its sole option, of additional Colonial Properties common stock or cash to provide Cornerstone shareholders value equivalent to that which they would have received had the Colonial Properties stock price been $31 for such measurement period. Colonial Properties will have the right to terminate if the average of its share price exceeds $49 for 20 consecutive days preceding 10 days prior to the close of the transaction. Colonial Properties was advised by Banc of America Securities LLC, which rendered a fairness opinion to the Colonial Properties board of directors. Citigroup Global Markets Inc. acted as co-advisor. Colonial Properties’ legal advisors were Hogan & Hartson LLP, Leitman, Siegal & Payne, PC and Sirote Permutt, PC Cornerstone was advised by Wachovia Securities. McGuireWoods LLP acted as its legal advisor.

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