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Equity Residential, AvalonBay Fall After Archstone Deal

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Nov. 27 (Bloomberg) -- Equity Residential and AvalonBay Communities Inc., the largest publicly traded U.S apartment companies, fell after agreeing to buy landlord Archstone Inc. from Lehman Brothers Holdings Inc. in a $6.5 billion deal.

Equity Residential, based in Chicago, fell 2.1 percent to $53.30 at 9:34 a.m. in New York. Arlington, Virginia-based AvalonBay decreased 1.4 percent to $127.20.

The two REITs will pay Lehman Brothers $2.69 billion in cash, along with stock in Equity Residential and AvalonBay valued at a combined $3.8 billion, and assume $9.5 billion of Archstone debt, New York-based Lehman said yesterday in a statement after the close of regular trading. The deal will result in Lehman and its affiliates owning 9.8 percent of Equity Residential and 13.2 percent of AvalonBay.

The transaction may help the real estate investment trusts grow quickly in markets where land is scarce and expensive. Equity Residential is acquiring a 60 percent interest in Archstone, including 78 properties with 23,110 units. AvalonBay’s 40 percent purchase of Archstone includes 66 properties with 22,222 units.

Equity Residential’s properties will be located mostly in Washington, D.C.; San Francisco; Southern California; and New York, while AvalonBay’s will be chiefly in the mid-Atlantic region and Southern California, the companies said yesterday in separate statements.

IPO Scrapped

Equity Residential and AvalonBay have 120 days to complete the purchase, Lehman said. The transaction replaces an initial share sale of Archstone that was to raise as much as $3.45 billion for Lehman, which filed the biggest bankruptcy in U.S. history in September 2008 and is selling assets to satisfy its creditors.

U.S. apartment occupancies rose in the third quarter at the slowest pace in more than two years, as low mortgage rates spurred would-be renters to buy homes instead. Rental revenue at Archstone in the three months through Sept. 30 increased 8.3 percent to $272.7 million from a year earlier, according to a regulatory filing. The company booked a loss of $176.6 million, after a $106.2 million profit a year earlier.

Equity Residential fell 4.6 percent this year before today and AvalonBay declined 1.3 percent, compared with an 11 percent advance for the Bloomberg REIT Index of 126 stocks.

To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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