ANNUAL REPORT 2006

Positioned for

Sustainable Growth

ABOUT THE COMPANY

Sumitomo Realty & Development Co., Ltd., a core member of theSumitomo Group, is one of Japan’s leading real estate companies.
The Company is well established as a comprehensive developerand supplier of high-quality office buildings and condominiums inurban areas.
With operations centered on four areas—leasing, sales, construction, and brokerage—the Company has achieved a combination of
growth potential and balanced operations that will drive its successin the challenging markets of the 21st century. Sumitomo Realty
remains committed to the creation of comfortable work and living
environments that contribute to a higher quality of life.

CONTENTSCONSOLIDATED FINANCIAL HIGHLIGHTS

1

AT A GLANCE

2

A MESSAGE FROM THE PRESIDENT

4

BUSINESS STRATEGIES
Medium-Term Management Plans
Balanced Portfolio

6
7

POSITIONED FOR SUSTAINABLE GROWTH

8REVIEW OF OPERATIONS
Leasing
Sales
Construction
Brokerage

12
14
16
18

OUR HISTORY19

CORPORATE GOVERNANCE

20

FINANCIAL SECTION

21

BOARD OF DIRECTORS AND AUDITORS46

CORPORATE DATA46

INVESTOR INFORMATION47

CAUTIONARY STATEMENT WITH RESPECT TO
FORWARD-LOOKING STATEMENTS
Statements made in this annual report with respect to plans, targets
and future performance that are not historical fact are forwardlooking statements. These statements are based on management’s
assumptions and beliefs in light of the information currently available. Sumitomo Realty & Development Co., Ltd. cautions that a
number of factors could cause actual results to differ materiallyfrom those discussed in the forward-looking statements. Such factors include but are not limited to macroeconomic conditions, supply and demand in the real estate market and interest rate trends.

CONSOLIDATED FINANCIAL HIGHLIGHTS
Sumitomo Realty & Development Co., Ltd. and its consolidated subsidiaries
Years ended March 31
Thousands of
U.S. dollars1

Millions of yen
2006

2005

2004

2006

Revenue from Operations................................

¥646,525¥616,115¥573,862$5,503,277

Operating Income ............................................

112,023

100,291

95,977

953,549

Ordinary Profit* ................................................

87,03874,39365,976

740,875

Net Income ......................................................

32,506

15,5486,320

276,694

Total Assets ..................................................... ¥2,460,080¥2,136,329¥2,090,970$20,940,415

For the YearAt Year-End
Shareholders’ Equity ........................................

375,656

320,098

303,875

3,197,616

Interest-Bearing Debt.......................................

1,267,032

1,038,389

1,048,629

10,785,087

Net Income .....................................................

¥ 68.33¥ 32.64¥ 15.34$0.58

Shareholders’ Equity ........................................

790.74673.40639.01

6.73

Cash Dividend Applicable to the Year ..............

10.00

9.00

9.00

0.09

ND/OP Ratio2 ....................................................

10.1

9.2

9.4

ND/E Ratio .......................................................

3.1

2.9

3.0

Per Share Data (Yen and Dollars)

Key Ratios (Times)
3

Notes: 1. U.S. dollar amounts in this report are translated, for convenience only, at the rate of ¥117.48=US$1, the approximate exchange rate as ofMarch 31, 2006.
2. ND/OP Ratio = Net interest-bearing debt (interest-bearing debt – cash, time and notice deposits) / (Operating income + Interest income anddividend income)
3. ND/E Ratio = Net interest-bearing debt (interest-bearing debt – cash, time and notice deposits) / Shareholders’ equity

Revenue from Operations

Operating Income

Ordinary Profit*(Billions of yen)(Billions of yen)(Billions of yen)
129.0

700.0
616.1

Net Income(Billions of yen)
105.0

47.0

646.5
112.0

573.9
533.9

96.0

497.9

87.0

100.3
74.4

88.5

32.5

66.0

80.4
56.8

23.0

47.1

15.5

5.0
’02

’03

’04

’05

’06

’07
(Forecast)

’02

’03

’04

’05

’06

’07
(Forecast)

’02

’03

’04

’05

’06

’07
(Forecast)

’02

’03

6.3

’04

’05

’06

’07
(Forecast)* Please refer to the note on page 5.

1

AT A GLANCE

Leasing

Sales

Office building, condominium, and otherproperty leasing and management andrelated activities

Mid- and high-rise condominium, detachedhouse, and housing lot development andsales and related activities

REVENUE FROM OPERATIONSREVENUE FROM OPERATIONS

178.0(Billions of yen)

193.0 202.8

221.2

234.3

(Billions of yen)

250.0
213.3
170.4

35.8%

224.2 224.7

183.7

34.4%
’02

’03

’04

’05

’06

’02

’07

’03

’04

’05

’06

(Forecast)

OPERATING INCOME(Billions of yen)

OPERATING INCOME(Billions of yen)
36.0

74.0

49.2

53.3

52.7

55.9

51.6%

’07
(Forecast)

63.3
24.4

25.8

’02

’03

32.3

32.4

33.1

’04

’05

’06

27.0%
’02

’03

’04

’05

’06

’07
(Forecast)Within the leasing business, the Urban Property
Management Division is responsible for the leasing of
office buildings and luxury condominiums. Also, thedivision conducts leasing operations that utilize special purpose companies (SPCs). The Urban Property
Development Division handles the acquisition anddevelopment of land for the leasing business. In addition, Sumitomo Realty masterleases almost all of theproperty holdings owned by SPCs and other Group
companies and operates a sublease business.
Sumitomo Fudosan Tatemono Service Co., Ltd., manages the office buildings and luxury condominiums
leased by Sumitomo Realty.

2

240.0

’07
(Forecast)

The Urban Property Development Division is responsible for the development and sale of condominiums,
office buildings for sale, detached houses, and housing lots and related activities. It is also engaged insales activities with Sumitomo Real Estate Sales Co.,
Ltd., while the management of condominiums after
completion is the responsibility of the Urban
Management Division of Sumitomo Realty and
Sumitomo Fudosan Tatemono Service Co., Ltd.

Construction

Brokerage

Detached house construction andremodeling and related activities

Brokerage and sales on consignment of realestate and related activities

REVENUE FROM OPERATIONS(Billions of yen)

REVENUE FROM OPERATIONS(Billions of yen)
54.0

150.0
115.3

124.5 125.1 127.4

49.2

135.2

20.7%

36.2

37.6

’02

’03

39.8

43.4

7.5%
’02

’03

’04

’05

’06

’07

’04

’05

’06

(Forecast)

OPERATING INCOME(Billions of yen)

’07
(Forecast)

OPERATING INCOME(Billions of yen)
19.0

10.0
8.2

8.4

17.0

8.7
13.5

7.0

7.1%

4.8

’02

13.8%
’03

’04

’05

’06

’07
(Forecast)

Sumitomo Realty’s Housing Business Division works
on the Company’s full remodeling package Shinchiku
Sokkurisan and the construction of new detachedhouses using two-by-four construction methods.
Sumitomo Fudosan Syscon Co., Ltd., is engaged inhouse renovations. Sumitomo Fudosan Tatemono
Service Co., Ltd., is in charge of condominium refurbishment. Universal Home Inc. is a franchiser specializing in standardized houses using conventional
construction methods.

8.0

7.8

8.5

’02

’03

’04

’05

’06

’07
(Forecast)

Sumitomo Real Estate Sales Co., Ltd., serves as anintermediary in the purchase and sale of real estateand is engaged in newly built residential property
sales agency services.

3

A MESSAGE FROM THE PRESIDENT

Junji Takashima
President

TARGETING SUSTAINABLE GROWTH
Under the Four-Year Business Reconstruction Plan, which started in April
1997, Sumitomo Realty successfully dealt with the effects of the bursting ofJapan’s economic bubble. Under the two successive plans, the New ThreeYear Growth Plan and the Top Gear Growth Three-Year Plan, we have madesteady progress and have continued to record a high rate of growth. We are
currently implementing the Top Gear Growth Three-Year Plan, which covers
the period from April 2004 to March 2007. We surpassed the original target
for ordinary profit* of ¥85.0 billion in the year under review, one year ahead ofschedule, and as a result we raised the target for ordinary profit in the final
year of the plan, ending March 2007, to ¥105.0 billion. Accordingly, in fiscal
2007, our major challenges are exceeding our goals by substantial margins
and formulating the next three-year management plan, under which we will
strive to further strengthen our foundation for sustainable growth to make itless susceptible to fluctuations in the operating environment.
RESULTS IN FISCAL 2006 AND FORECASTS FOR THE FUTURE
In fiscal 2006, the second year of the Top Gear Growth Three-Year Plan,
Sumitomo Realty recorded a 4.9% increase in revenue from operations, to¥646.5 billion, an 11.7% gain in operating income, to ¥112.0 billion, and a
17.0% rise in ordinary profit*, to ¥87.0 billion. Net income rose 109.1%, to¥32.5 billion, the first new record high in four years. In consideration of thisperformance, we raised the annual per-share cash dividends 11.1%, to¥10.00, an increase of ¥1.00.
As shown in the following table, in fiscal 2007, the final year of the plan, we
expect to surpass all of the initial objectives set when the plan was formulated
in November 2003. By successfully following up the previous two plans with
the Top Gear Growth Three-Year Plan, we will achieve 10 consecutive years ofhigher revenue, operating income, and ordinary profit and 7 consecutive yearsof record-high ordinary profit.
(Millions of yen)
Fiscal Year

2004
(Actual)2005(Actual)2006(Actual)2007(Forecast)

2007(Planned)

Revenue from operations

573,862

616,115

646,525700,000

700,000

Operating income

95,977100,291

112,023

129,000

115,000

Ordinary profit*

65,97674,39387,038105,000

85,000OUR NEXT THREE-YEAR PLAN
Even as we are in the process of successfully completing the Top Gear
Growth Three-Year Plan, we are working to formulate our next three-year
management plan. In leasing and sales, which are capital-intensive businesses
that account for about 70% of our revenue, several years are required fromthe point when a site is acquired until the building is completed and begins togenerate revenue. Our ability to record sustainable growth under the next
three-year management plan will depend upon our acquisition of prime sites,
and we have already acquired nearly all of the sites that will be needed for our
implementation of the plan. Due to the economic recovery and rising land
prices, competition in site acquisition is intensifying, but we will work toachieve growth under the next plan by focusing the Group’s comprehensive
strengths on securing additional prime sites.

4

OUTLOOK FOR OUR OPERATING ENVIRONMENTIn the period covered by the next three-year management plan, a number offactors will support improvement in the office building market. As older buildings lose commercial attractiveness, replacement demand will increase, and, as
the economic recovery continues, companies will need additional office space.
In addition, the real estate industry was slow to predict the market recovery,
and as a result the supply of new buildings will be short for some time.
In the condominium market, prices will have to be adjusted to reflect higher
land prices and construction costs. We anticipate continued strong demand
from first-time buyers, centered on the children of the baby boom generation,and from second-time buyers, centered on senior citizens living in detachedhouses. However, if higher prices adversely affect sales, it is possible thatthe current condominium boom, which is said to be the longest in domestic
history, will cool off. The management of this situation will require carefulattention.
In the detached house market, construction might be weak due to a decline
in first-time buyers accompanying the boom in condominium sales. On theother hand, our Shinchiku Sokkurisan remodeling business is expected tocontinue to benefit from favorable demand stemming from the aging of large
numbers of houses that were built in the 1970s, a period of active detachedhouse construction.
In brokerage, the rise in prices of new condominiums has led to an increasein the number of transactions in existing units, and we expect prices to continue to increase. As a result, higher profits are expected due to growth in commissions per transaction.
On the other hand, in financial markets, there is growing concern that
long-term interest rates, currently at record low levels, might turn upward.
In response, the Company is taking advantage of the improved credit ratingthat it received as a result of its improved performance and financial position.
That improved rating has mitigated our fund-raising costs, and we will continue aggressively working to minimize the effect of future interest rate rises byimplementing an ongoing shift toward long-term, fixed-rate interest-bearing debt.
There are risks, such as trends in the condominium market and in interest
rates, but our operating environment is favorable overall. In the coming
months, we will carefully and comprehensively evaluate market trends andformulate our next three-year management plan to help us realize sustainablegrowth.
We are eager to face the challenges that lie ahead, and we would like to ask
for your continued support as we continue working to achieve sustainablegrowth.
June 2006

Junji Takashima President* Ordinary profit, which equals operating income after adjustment for non-operating gains/losses, is a management index that is widely used in Japan. Due to differences in accounting standards, ordinary profit is
not broken out in the Company’s English-language financial statements, but it is included here because it
plays an important role in the calculation of incentive payments for directors.

5

BUSINESS STRATEGIES

Medium-Term Management Plans
Sumitomo Realty’s greatest strength is the Company’s growth potential. We recorded continued growththrough the successful implementation of our previous two management plans, and we are further
enhancing that growth potential with our current plan.
STEADY RESULTS WITH PREVIOUS PLANS
Under the Four-Year Business Reconstruction Plan,
which started in April 1997, we regained profitability
with a record-setting performance, reduced interestbearing debt, and disposed of non-performing assets.
Revenue from operations reached ¥459.2 billion.
The New Three-Year Growth Plan began in April 2001.
Under this plan, we registered seven consecutive yearsof higher revenue and profit, commenced new realestate investment, and achieved rapid growth in our condominium sales business. Substantial contributions toimproving our financial position were made by continued
reductions in interest-bearing debt, advance measures in
preparation for the introduction of impairment accounting,and an increase in capital through a public offering.
Revenue from operations reached ¥573.9 billion.
ON COURSE WITH THE TOP GEAR GROWTH
THREE-YEAR PLAN
To achieve further growth, we formulated the Top Gear
Growth Three-Year Plan in November 2003 and began

Medium-Term Management Plans (Billions of yen)
800

REVENUE

700

Revenue from Operations

Successful Implementation ofMedium-Term Management Plans

574

600
459
400

Four-Year Business Reconstruction Plan
(April 1997 to March 2001)

339

200

0

’97

’98

’99

’00

’01

Four-Year Business
Reconstruction Plan

150

’02

’03

’04

New Three-Year
Growth Plan

’05

’06

’07
(Forecast)

Top Gear GrowthThree-Year Plan

PROFIT

129

Ordinary Profit

Operating Income

105

96

100
75
66
43

50

6

’97

’98

’99

’00

’01

• Recovered profitability with record-setting performance• Developed idle properties into cash-generating properties• Reduced interest-bearing debt through securitization,
SURF, etc.
• Disposed of non-performing assets

New Three-Year Growth Plan
(April 2001 to March 2004)• Recorded 7 consecutive years of higher revenue andprofit—Planned to double profits• Commenced new real estate investment using SPCs
• Prepared for introduction of impairment accounting• Continued to reduce interest-bearing debt andimplemented capital increase

Top Gear Growth Three-Year Plan

39

(April 2004 to March 2007)

30

to implement it in April 2004. Under this plan, we arecontinuing to follow an aggressive course of expansion.
With market interest rates stable at a generally low
level, and a rapid recovery in conditions in the officebuilding market, we expect to exceed the initial objectives of the current management plan.
Under this plan, we adopted mandatory impairment
accounting and completed the handling of non-performing assets and unrecognized losses. Now, we havereached the stage of EPS growth. Furthermore, as aresult of the capital increase implemented under the previous plan, we have been better able to conduct upfront
investment in the acquisition of sites for condominiums
and office buildings, key resources for our future
growth. Accordingly, under the current plan, we are reinforcing our development pipeline. In the future, by further increasing the percentage of prime properties in our
office building portfolio, we will advance our “build-andscrap” strategy and foster continued growth under the
next management plan.
For fiscal 2007, the final year of the current plan, we
expect to surpass the plan’s goals for revenue from operations, operating income, and ordinary profit, achieving our
10th consecutive year of higher revenue and profit andour 7th consecutive year of record-high ordinary profit.

’02

’03

’04

’05

’06

’07
(Forecast)• Achieved sustained growth—10 consecutive years ofhigher revenue and profit• On course to surpass the plan’s objectives

Balanced Portfolio
Our achievement of sustained growth has been the result of our well-balanced operations. We have a balanced portfolio in four operational fields—leasing, sales, construction, and brokerage—that have different
risk profiles and capital requirements.
CHARACTERISTICS OF OUR FOUROPERATIONAL FIELDS
Leasing and sales are our traditional main fields of business. These are capital-intensive fields; returns and risk
are both high and substantial upfront investment isrequired, but the level of human resources is relatively
low. In leasing, the period from the initial investment to
the generation of revenue—the operational cycle—islong, but once a building is opened for occupancy it provides a stable, sustained source of revenue. The sales
business, however, is characterized by a shorter operational cycle with volatile market conditions. Nonetheless,revenue and profit are both relatively high.
Our house construction operations and brokerage
operations are order-based businesses with low capitalrequirements and no sales risk but substantial humanresources requirements. These operations have beendeveloped more recently. In house construction, theoperational cycle is short, about six months to a year,
but product development capabilities are very important. Brokerage operations have the shortest operational cycle of our fields of business but require strong,
highly competitve service networks.
TAKING STEPS TO MAINTAIN WELL-BALANCEDOPERATIONSAs described above, Sumitomo Realty’s four operational fields have complementary operational cycles
and market characteristics, and in the past the adverse
effects of changing market conditions on a particularfield have generally been offset by favorable

Sumitomo Realty’s Balanced Portfolio
CapitalLeasingHigh level of capital,
low level of humanresources

Relatively high level ofcapital, relatively low
level of humanresources

Sales

Relatively low level ofcapital, relatively highlevel of humanresources

Construction

Low level of capital,
high level of humanresources

Brokerage

Human Resources

performances in others. As a result, the Company has
been able to continue to record increases in revenue
and profit. In the future, our basic strategy will entail
taking steps to maintain well-balanced growth in ouroperational portfolio. Moreover, to further reinforce ourgrowth prospects, we will endeavor to develop a strong
market presence in a fifth core field of operations, andwe are currently searching for the field that would bestcomplement our existing operations.

Revenue from Operations by Segment (Billions of yen)
250.0

250
Sales

Leasing

Construction

240.0

Brokerage

200
150.0

150

100
54.0
50

0

’97

’98

’99

’00

’01

’02

’03

’04

’05

’06

’07
(Forecast)7

Positioned for

Sustainable Growth
BunkyoJapan

Shinjuku
Chuo

ChiyodaShibuyaMinatoTokyo CBD (Central Business District):
7 wards, comprising Chiyoda, Minato, Chuo,
Shinjuku, Shibuya, Shinagawa, and Bunkyo
BunkyoShinjuku
ChiyodaShibuyaChuo
MinatoShinagawaShinagawaTokyo’s 23 wards
Major flagship buildings
Buildings scheduled for completion in
fiscal year ending March 2007
Other large buildings

As of the end of March 2006, Sumitomo
Realty’s portfolio of office buidings had agross floor area of 3.1 million square meters.

Progress in New Development

Total increase of approximately
2.0 million m2 from FY 1998 to FY 2010

Gross floor area (Thousand m2)+660(21 buildings)+420(11 buildings)+640(17 buildings)+280(10 buildings)

FY 1998
2001
Four-Year Business
Reconstruction Plan8

FY 2002

2004
New Three-Year
Growth PlanFY 2005
2007
Top Gear GrowthThree-Year PlanFY 20082010
Next Three-YearManagement PlanGROWTH DRIVERSGROWING DEMAND FOR PRIME

Since 1997, Sumitomo Realty has

PROPERTIES

recorded a high rate of growth as it

In the central Tokyo office building

worked to implement three successive

market, there is strong demand for

medium-term management plans.

buildings that meet the criteria for

While centered on leasing and sales,prime properties; they are close to sta-

our growth is well balanced andtions and business areas, are new andextends to all of our fields of business.

feature modern amenities, and offer

Looking ahead, office leasing, whichlarge areas on each floor. These prime

features high demand and stable rev-properties generate high levels of rev-

enues, will drive our future growth.

enues, while it remains difficult to find

DEVELOPMENT PIPELINE

Sumitomo Fudosan Kanda Building

tenants for buildings that are far fromare in short supply, which has beenstations, old, or small.

a key element in our land acquisition

In leasing operations, several years are

efforts.

required to move from the acquisition

CLOSE—LOCATIONS NEAR THE

of a site to the completion of a build-

CENTRAL BUSINESS DISTRICTNEW—BRAND-NEW AND RECENTLY

ing. In implementing the current medi-

To be a prime property, a building

CONSTRUCTED BUILDINGS

um-term management plan, we havemust be in the central business district

The strong demand for recently con-concentrated on aggressive site acqui-and near a major station. In the Tokyo

structed buildings is a result of tenantsition in prime sections of central

central business district, where manyneeds for the following features:Tokyo, where competition for siteof Japan’s leading companies have

1. Reinforced floors, high-capacity

acquisition is intensifying. As a result,

their offices, this is an even more

electrical systems, and uninterrupt-

over the next several years our portfo-

important factor. Large, recently con-ible power supplies to accommo-

lio of office buildings will be further

structed buildings in good locations

date large computer servers

enhanced as a number of new prime
properties are opened for occupancy.

OFFICE BUILDING DEVELOPMENT PROJECTS* (Fiscal Years 2007 to 2009)

In the fiscal year ending March 2007,
we will complete seven office buildings
with a gross floor area of about

Project

Location (Tokyo)

Gross Floor Area (m2)

Kojimachi Building No. 4 (SPC)

Chiyoda Ward

4,000

Expected Completion

Apr. 06

Kanda Building (SPC)

Chiyoda Ward

29,000June 06

Kudan Building (SPC)

Chiyoda Ward

18,000June 06

200,000 square meters. Each of these

Kojimachi Building No. 3

Chiyoda Ward

4,000

June 06

buildings is located on a prime site in

Aoyama-Street Building

Shibuya Ward

9,600

July 06

Mita Twin Building East (SPC)

Minato Ward

34,700Aug. 06
Sept. 06

Tokyo’s central business district, where
demand for office buildings is high. In a

Mita Twin Building West (SPC)

Minato Ward

99,2007 Buildings

198,500

Jingumae Project (SPC)

Shibuya Ward

18,900Nihonbashi-Horidomecho Project

Chuo Ward

5,100

July 07

Yotsuya-Arakicho Project (SPC)

Shinjuku Ward

14,500Oct. 07

Nishi-Kanda 3-chome South Project (SPC)

Chiyoda Ward

13,200Oct. 07

4 Buildings

51,700Total (FY 2007)

reflection of positive market trends, weare making rapid progress in securing
tenants under terms that are morefavorable than we initially planned.
For future years, we have alreadyTotal (FY 2008)

June 07

made firm plans to build and open new
office buildings in Tokyo’s central business district with gross floor area of

Roppongi 7-chome Project (SPC)

Minato Ward

13,000

Apr. 08

Nishi-Shinjuku 4-chome Project (SPC)

Shinjuku Ward

21,200

May 08

Iidabashi 3-chome Project (SPC)

Chiyoda Ward

15,200

May 08about 1 million square meters, which

Kanda-Surugadai Project

Chiyoda Ward

14,500Aug. 08

is about 30% of the gross floor area of

Akihabara Project (SPC)

Chiyoda Ward

29,200Feb. 09

Ginza 8-chome Project (SPC)

Chuo Ward

47,000Mar. 09

Nishi-Shinjuku 7-chome Project

Shinjuku Ward

41,200Mar. 09

7 Buildings

181,300

our current portfolio. (Please see
accompanying table.)

Total (FY 2009)* Table includes only certain projects.

9Positioned for Sustainable Growth

The Mita Twin Building West, which is scheduled for completion in September 2006, will have a base floor of 3,238 square meters.

Floor load

Air conditioning zones (Typical base floor)

1 t /m2 zone

96 individually controlled air conditioning zones

500 kg/m2 zone

10

The Mita Twin Building West will have a floor load of 500 kg/m2 (1 ton/m2 in the heavy duty zone) (left). It will also offer completely separated climate
control zones, with 96 separate zones in which temperature can be individually controlled (right). As shown in the table on page 11, these features are foundin buildings completed in 1997 and thereafter.

2. Separate climate control systems

Moreover, more than 40% of ourconditions for prime properties—close,

for each suite and high ceilings

buildings have been completed sincenew, and large—are in strong demand,

3. Advanced earthquake countermea-

1997, when we took the lead in the

our competitive portfolio will provide asures, such as vibration damping andapplication of new building design con-strong foundation for us to utilize ourearthquake-resistant construction

cepts. These high-quality buildings

strengths—development of high-value-

offer leading-edge earthquake-resistantadded office buildings, tenant leasing,structures, separate climate control

and property management. We will uti-

LARGE—LARGE-SCALE BUILDINGS

systems for each suite, reinforced

lize that foundation to maximize the

Buildings that can accommodate multi-

floors for heavy loads, high-capacity

earnings potential of our office building

ple units on a single floor enable ten-electrical systems, high ceilings, andoperations and achieve sustainable

ant companies to increase theother attractive features, and they are

growth in the years ahead.

efficiency of their operations, and in

the focus of strong demand fromrecent years there has been a trend formany tenants.

4. Advanced security systems

companies to consolidate their offices.
As a result, demand for large-scale

COMPETITIVE GROWTH

buildings continues to increase.

FOUNDATION

Gross Floor Area
(Thousand m2)

As we open new buildings over the
SUMITOMO REALTY’S PORTFOLIO

next several years, prime properties

As of the end of March 2006, our port-

will account for an even higher per-folio of office buildings had a grosscentage of our portfolio. To respondfloor area of 3.1 million square meters

to the structural change in market

and an average age of 13 years, thedemand toward prime properties andlowest among Japan’s major realaway from buildings that are older,

estate companies. Of these buildings,

smaller, or in less attractive locations,

92% were located in the 23 wards of

we invested aggressively in new build-Tokyo, with 83% in Tokyo’s central

ing construction. Our policy is to follow

business district. Furthermore, 80% of

a “build-and-scrap” strategy—under

the portfolio is made up of large-scale

which we build new buildings and thenbuildings of more than 10,000 squaresell buildings that are relatively lessmeters of gross floor area, and morecompetitive—thereby further increas-than 90% of the buildings meet or

ing the concentration of prime proper-

exceed earthquake-resistance stan-ties in our portfolio.

dards that took effect in 1981 and area key yardstick for earthquake safety.

In the Tokyo central business district,

2,752

3,082

3,112

’05

’06

2,876

2,360

’02

’03

’04

Leasing Portfolio

3.11 million m2
Tokyo CBD* 83%
Close
23 wards 92%

where buildings that meet the three
New

Less than 20 years old** 92%

LargeOver 10,000 m2 80%

OFFICE BUILDING FEATURES
Before 1981

1982–1996

1997 and after

Earthquake
protection

Previous quakeresistant structure

New quakeresistant structure

Anti-sway
structure

Ceiling height*

2.5 m

2.7 m

2.9–3.3 m

Floor load

300 kg/m2

300–500 kg/m2

500–1,000 kg/m2

Air conditioning

Central air
conditioning system

Climate control
zones

Separate climate
control systems

Power capacity

45 VA /m2

60 –70 VA /m2

85 VA /m2 and over

* Tokyo CBD (Central Business District): 7 wards,
comprising Chiyoda, Minato, Chuo, Shinjuku, Shibuya,
Shinagawa, and Bunkyo** Two of the Company’s major properties, the Shinjuku
Sumitomo Building and the Shinjuku NS Building, areincluded in this category because, although they are
more than 20 years old, they are super high-risebuildings with high-performance facilities and offer
earthquake resistance in excess of the standards ofnewer buildings.

* Includes raised floors

11

REVIEW OF OPERATIONS

Leasing
In leasing, Sumitomo Realty has used innovative initiatives to create
new opportunities. In this way, the Company has built a position ofleadership in the leasing industry based on an outstanding portfoliothat includes many new, upscale buildings in central Tokyo and on a
direct involvement in operations.

Buildings in the 23 wards of Tokyoaccounted for 92.4% of the portfolio’s
gross floor area, or 2.9 million square
meters. The advanced interior featuresof our buildings are complemented
with distinctive exterior designs,
including hotel-like entranceways andall-glass exteriors. Sumitomo Realty
creates innovative buildings withstrong market presences.
Overview of the Fiscal YearIn the Tokyo office building market,
strong demand from tenants accompanying improved corporate performances has led to a tightening of the
Shinjuku Oak City

demand-supply balance for new buildSumitomo Realty’s Strengths

ings and a marked increase in rents.

Sumitomo Realty made its full-scale

The vacancy rate for existing buildings

entry into the leasing business in thecontinues to decline due to strong

latter half of the 1970s. In 1995, fol-demand from companies seeking

lowing the collapse of Japan’s bubble

additional floor space, and actual

economy, we were the first company

rents have begun to increase. As ain the industry to restart construction

result of higher market rents, tenants

work on office buildings. We paid spe-are accepting increased rents whencial attention to large-scale projects inextending leases for prime buildings,

urban areas, especially those areas

and that trend has begun to spread

legally designated for redevelopment,

to ordinary buildings as well.

and we currently have about 200 build-Izumi Garden Tower

12

In this setting, we recorded anotherings for lease. At the end of Marchyear of substantial growth in revenue

2006, the gross floor area of our port-

and profit in the leasing business.

folio was 3.1 million square meters.

The vacancy rate in existing buildings

REVIEW OF OPERATIONSRevenue from Operations

Operating Income andOperating Margin(Billions of yen)(Billions of yen)

178.0

’02

193.0 202.8

’03

221.2

’04

’05

74.0

250.0

234.3

63.3

’06

53.3

52.7

27.6

27.6

26.0

25.3

27.0

’02

’03

’04

’05

’06

’07

(Forecast)

29.6

’07

(Forecast)

Operating Income
Operating Margin (%)

Sumitomo Fudosan Shin-Akasaka Building

improved, from 6.9% at the end of the

55.9

49.2

PRINCIPAL BUILDINGS

previous fiscal year to 5.7% at the end

Nameof the year under review. In addition,

No. of Floors Completion(aboveground /underground)

Location(Tokyo CBD)

Gross Floor
Area (m2)

205,503

Izumi Garden Tower

43 / 4Oct. 02 Minato Ward

Shinjuku Sumitomo Building

52 / 4Mar. 74 Shinjuku Ward

177,467

Shiodome Sumitomo Building and the

Shinjuku Oak City

38 / 2

Jan. 03 Shinjuku Ward

117,446

Tokyo Shiodome Building, were open

Shiodome Sumitomo Building

25 / 3

July. 04 Minato Ward

99,913for the entire year under review, andTokyo Shiodome Building

37 / 4Jan. 05 Minato Ward

95,128

Shinjuku NS Building

30 / 3

Sept. 82 Shinjuku Ward

75,046

Shibakoen First Building

35 / 2

June. 00 Minato Ward

63,822

Building was opened for occupancy

Chiyoda First Building West32 / 2

Jan. 04 Chiyoda Ward

61,501during the year. Revenue from opera-

Sumitomo Fudosan Iidabashi Building No. 3

24 / 2

Oct. 02 Shinjuku Ward

53,047

tions rose 5.9%, to ¥234.3 billion.

Sumitomo Fudosan Iidabashi First Building

14 / 2Mar. 00 Bunkyo Ward

52,855

Chiyoda First Building East

17 / 2

Oct. 98 Chiyoda Ward

37,473

Sumitomo Fudosan Shibakoen Tower

30 / 2

Oct. 01 Minato Ward

36,605

Shibuya Infoss Tower

21 / 4Mar. 98 Shibuya Ward

34,183

Roppongi First Building

20 / 4Oct. 93 Minato Ward

31,516

Sumitomo Fudosan Korakuen Building

20 / 2

Aug. 98 Bunkyo Ward

28,633

Sumitomo Fudosan Oimachi-ekimae Building

14 / 2

Sept. 02 Shinagawa Ward

28,152

Sumitomo Fudosan Takanawa Park Tower

20 / 2

Jan. 95 Shinagawa Ward

23,961in a reflection of strong corporate

Sumitomo Fudosan Shiba Building

15 / 2

May. 90 Minato Ward

23,764

results, demand for office buildings is

Nihonbashi Hakozaki Building

17 / 2Mar. 96 Chuo Ward

23,486

expected to remain firm and the mar-Hanzomon First Building

15 / 2

Jan. 04 Chiyoda Ward

23,138ket environment to remain on a favor-

Note: Figures for gross floor area indicate the area managed by Sumitomo Realty.

certain buildings, such as thethe Sumitomo Fudosan Shin-Akasaka

Operating income was up 13.3%,
to ¥63.3 billion.
OutlookIn the fiscal year ending March 2007,

able course. Moreover, in addition to
improved vacancy rates and higher
rents for our existing buildings, weplan to open seven new buildings during the year. As a result, we forecast
continued growth in revenue and profit, with revenue from operations of¥250.0 billion, an increase of 6.7%,
and operating income of ¥74.0 billion,
up 16.9%.

Tokyo Shiodome Building

Shibakoen First Building

13

SalesSumitomo Realty pioneered the Japanese market in condominium
development for sales, establishing its condominium sales businessearlier than almost all of its competitors. Today, the development andsale of condominiums is the core of the Company’s sales business,accounting for more than 95% of sales in this segment.

The Tower & Parks Denentoshi Mizonokuchi

possible by the large scale of the buildings, and elegant entrances make ourcondominiums sought after by a wide
range of consumers with diverse
lifestyles. As a result, our high operating margin is at the top of the industry.
Market fluctuation risk is a criticalfactor in the condominium sales business. The Company’s policy is to offera stable supply of condominiums andWorld City Towers

to enhance Sumitomo Realty’s brandSumitomo Realty’s Strengths

through the ongoing sale of high-quali-

The Company’s condominium opera-ty units. Looking ahead, the Company

tions are centered in the Tokyo metro-

will continue striving to maintain its

politan area and Japan’s five otherhigh ranking and further expand its

major urban areas—Osaka/Kobe,

business.

Sapporo, Sendai, Nagoya, andCity Tower Nishi-Umeda

14

Fukuoka. In addition, in recent years

Overview of the Fiscal Year

we have also enhanced our presence

In the condominium market, the sup-in such other major cities as Niigata

ply in the Tokyo metropolitan area

and Fukushima. We develop and sellremained at a high level in the year

approximately 5,000 units a year.

under review, with more than 80,000

For the past five years, we haveunits sold for the seventh consecutive

been one of the top five companies

year. The sales environment remained

nationwide in condominium units sold.

favorable; demand was broad-based,

This high ranking is the result of ourincluding not only first-time buyers,

central urban strategy, which we

principally the children of baby boomers,

implemented ahead of competitors,

but also middle-aged customers, seniorand our aggressive approach to large-

citizens, and double-income families.

scale and high-rise condominiums. Our

We gave priority to smooth delivery

landmark exterior designs, the richfor a large-scale condominium building

array of common facilities that is madeopened in March 2006. Sales of some

REVIEW OF OPERATIONSRevenue from Operations

Operating Income andOperating Margin

Units Delivered(Billions of yen)(Billions of yen)

(Units)

213.3
170.4

’02

240.0

224.2 224.7

183.7

’03

’04

’05

’06

’07

(Forecast)

24.4

25.8

14.3

14.0

’02

’03

32.3
15.1

32.4

33.1

14.4

14.7

’04

’05

’06

36.0
4,146

15.0

’07

’02

(Forecast)

Operating Income
Operating Margin (%)

4,499

4,473

’03

’04

4,994

4,992

’05

’06

Note: Total of condominium units, detachedhouses, and land lots

units in this building will be recorded inbillion, up 6.8%, and operating income

the fiscal year ending March 2007.

of ¥36.0 billion, an increase of 8.7%,

As a result, the total number of condo-

for the sixth consecutive year of higher

minium units, detached houses, andrevenue and profit. At the beginningland lots delivered in the year underof the fiscal year, we had already con-review declined by 2 from the previous

cluded sales contracts for 47% of

fiscal year, to 4,992. However, thethe 5,200 condominium units andoperating margin improved fromdetached houses that we plan to sell

14.4% in the previous year to 14.7%

in the fiscal year ending March 2007,

in the year under review, and wecompared with 48% a year earlier.

recorded the fifth consecutive year of

We are working to achieve our objec-

higher revenue and profit. Revenue

tives as rapidly as possible throughfrom operations rose 0.2%, to ¥224.7

further sales promotion initiatives.

Park Square Saitama-Shintoshinbillion, and operating income was up
2.4%, to ¥33.1 billion.
Although the number of condomini-

CONDOMINIUM DEVELOPMENT PROJECTS
Project

Location

No. of Unitsum units sold declined by 369, to

No. ofFloorsScheduled
DeliveryWorld City Towers (B, C)

Minato Ward, Tokyo

1,052

42

FY 2007

Le Cinq Osaki City Tower

Shinagawa Ward, Tokyo

254*

27

FY 2007

The Tower & Parks Denentoshi
Mizonokuchi

Kawasaki

648*

32

FY 2007

City Tower Nishi-Umeda

Osaka

349*

50

FY 2007

City Tower Gran Tennouji

Osaka

246*

43

FY 2007

Park Square Fujigaoka

Nagoya270

15

FY 2007

Park Square Saitama-Shintoshin Saitama

498

15

FY 2007 /2008

we expect conditions in the condo-

City Tower Sendai-Tsutsujigaoka
Twin Towers

Sendai

184

19

FY 2007 /2008

minium market to remain strong, with

City Tower Sapporo-Odori

Sapporo182

41

FY 2008

support from solid condominium pur-Mejiro-Takada Project

Toshima Ward, Tokyo

About 300–

FY 2008

Sangenjaya Project

Setagaya Ward, Tokyo

About 300–

FY 2008

Mita-Koyamacho Project

Minato Ward, Tokyo

About 500*–

FY 2009

sale of a total of 5,300 condominium

Toyosu Project

Koto Ward, Tokyo

About 1,000–

FY 2009

units, detached houses, and land lots,

Osaka-Sagisu Project

Osaka

About 300–

FY 2009

an increase of 308. Our objectives are

Osaki Station Project

Shinagawa Ward, Tokyo

About 1,100*–

FY 2010

Toyosu Project II

Koto Ward, Tokyo

About 800–

FY 2010

4,860, the number of condominium
units completed but not yet solddeclined from 1,277 to 794 at the endof the fiscal year.
OutlookIn the fiscal year ending March 2007,

chase demand. We are forecasting therevenue from operations of ¥240.0* Number of units includes the units of business partners.

15

Construction
In the construction business, Sumitomo Realty’s business comprises theconstruction of detached houses and house remodeling. Our construction operations are order based and do not require substantial amountsof capital.

[Shinchiku Sokkurisan]• Sales engineer system:
Most of our sales personnel haveengineering qualifications.
• Carpenters:
We use carpenters who work
exclusively for Sumitomo Realty.

J-Urban III• Fixed price:

BeforeSumitomo Realty’s Strengths

We provide the customer with a

REMODELING

fixed price per unit of floor area, so

In 1996, Sumitomo Realty launchedthere are no concerns about addi-

the Shinchiku Sokkurisan Full
Remodeling Package, which addressed
the concern that remodeling could

We remodel homes while thesometimes be more expensive thancustomers continue to live in them,rebuilding in Japan due to the risk of
cost overruns. With Shinchiku

Aftertional construction charges.
• No need for temporary moves:which is a major advantage.
• Earthquake resistance:

Sokkurisan, a house can be fully

We incorporate earthquake-resist-

remodeled at half the cost and in halfance strengthening measures

the time required to rebuild it. And

based on a computerized analysis

because Shinchiku Sokkurisan usesof the home as well as measures toless materials, it is also environmental-

prevent damage from termites andly friendly. We are the only major realmoisture.

estate company offering this type of
product, and Shinchiku Sokkurisan has

DETACHED HOUSES

been well received in the marketplace.

Sumitomo Realty used the know-how

The cumulative total number of ordersthat it acquired in building and selling

has surpassed 30,000 units, andhomes constructed with the two-by-

Shinchiku Sokkurisan continues tofour method in California to launch therecord solid growth.

American Comfort line of high-quality,
low-cost Western-style homes inWith the use of craftsman boasting highly refined skills, our Shinchiku Sokkurisan remodelingservices can even be used with traditional Japanese houses that are more than 100 years old.

16

Japan in 1995. Today, under the brandREVIEW OF OPERATIONSRevenue from Operations

Operating Income andOperating Margin

Shinchiku Sokkurisan andCustom Home Units Contracted(Billions of yen)(Billions of yen)

(Units)

150.0
115.3

124.5 125.1 127.4

10.0

135.2
7.0
5.6

8.2
6.6

8.4

8.7

6.6

6.5

6,116
5,550
4,843

6.7

4.8

3,770
2,362

4,121
2,083

2,083

2,271

2,122

’03

’04

’05

’06

4.1

’02

’03

’04

’05

’06

’07

(Forecast)

’02

’03

’04

’05

’06

’07

(Forecast)

Operating Income
Operating Margin (%)’02

Shinchiku Sokkurisan
Custom Homes

name Series of World Home Designs,

Overview of the Fiscal Year

Outlook

we sell homes based on designs from

Conditions in the market for detached

In Shinchiku Sokkurisan operations,several countries. In April 2003, we

housing remained difficult due to a

we anticipate continued replacement

launched the J-Urban home design,

declining trend in detached housing

demand associated with large num-which combines the excellent security

starts. However, our Shinchiku

bers of houses built during previous

features of condominiums with the

Sokkurisan remodeling operations

periods of active construction. In the

superior ventilation and lighting ofrecorded a strong performance.

fiscal year ending March 2007, we will

detached houses. J-Urban has been

Revenue from operations rose 6.1%,

continue to expand our operations bywell received in the marketplace andto ¥135.2 billion, and operating income

further enhancing our network of oper-

has received a Good Design Awardwas up 3.7%, to ¥8.7 billion, for theational bases and bolstering our sales

from the Japan Industrial Design

fifth consecutive year of higher rev-

system.

Promotion Organization.

enue and profit. Shinchiku Sokkurisan

In detached housing, in the fiscal

contributed ¥63.1 billion to revenue

year ending March 2007, we will strive[Detached Houses]from operations, detached housing

to further increase orders for J-Urban• Advanced performance:¥47.3 billion, and other business ¥24.7

series homes, improve sales efficiency

billion.

by closing unprofitable branches, andOur original Power Column Method
makes these homes 1.3 times

Shinchiku Sokkurisan continued tomore earthquake resistant thanpost strong, double-digit growth, withtion system. In these ways, we will

conventional two-by-four homes.

orders rising 10.2% in the year underendeavor to strengthen our operational• Fixed price:

raise quality by bolstering our construc-review, to 6,116, and completed units

foundation. In house construction

We have an easily understood pric-

up 11.5%, to 5,748. As a result, in theoperations, our objectives are 8,900

ing system, and the use of originalyear under review, the cumulative totalorders, 6,700 for Shinchiku Sokkurisanmaterials and large-volume procure-number of Shinchiku Sokkurisan orders

remodeling and 2,200 for detachedment enables us to achieve pricethat we have received since wehousing, and 8,500 deliveries, 6,500

reductions.

launched this business in 1996 sur-for Shinchiku Sokkurisan and 2,000 forpassed 30,000. In detached housing,detached housing. In addition, we are

Our homes are backed by a 20-year

although our mainstay J-Urban series

targeting revenue from operations ofguarantee and our specialists con-of urban-style homes maintained¥150.0 billion, up 11.0%, and operating

duct periodic inspections.

strong popularity, overall orders wereincome of ¥10.0 billion, up 14.4%, fordown 6.6%, to 2,122 units, and com-

our sixth consecutive year of higher

pletions were up 1.0%, to 1,939 units.

revenue and profit.

• Complete after-sales support:

17

REVIEW OF OPERATIONSBrokerage
The Company’s real estate brokerage business is handled by
Sumitomo Real Estate Sales Co., Ltd., which was established in 1975
to conduct sales of condominiums developed by Sumitomo Realty.
After entering the real estate brokerage sector in 1979, Sumitomo
Real Estate Sales achieved significant success in that field, and it waslisted on the first section of the Tokyo Stock Exchange in 1998.
Sumitomo Realty’s Strengths

224 offices at the end of March 2006,

Under the STEP brand name, Sumitomo

an increase of 6 from a year earlier. We

Real Estate Sales operates a network ofalso renovated existing offices. In addi-

brokerage offices with close ties to local

tion, we worked to improve sales effi-

Revenue from Operations(Billions of yen)
54.0

communities. The network has been

ciency by expanding Internet-based

steadily expanded and upgraded, andtransactions. In wholesale brokerage

the number of offices reached 224 bybusiness, we focused on brokerage

the end of March 2006. Because all ofservices for properties for investment

the brokerage offices are directly operat-

and on office leasing activities, and weed, the network boasts high profit mar-recorded higher revenue and profit.

gins. Sumitomo Real Estate Sales holds

49.2
36.2

37.6

39.8

’02

’03

’04

43.4

’05

’06

As a result, revenue from operations

the number one position in the industry

was up 13.3%, to ¥49.2 billion, andin terms of brokerage revenue fromoperating income rose 25.8%, to ¥17.0

direct operations and in terms of prof-

billion. The operating margin improved

itability. In the future, the company willto 34.5%, from 31.0% in the previous

continue working to expand its market-

fiscal year.

Operating Income andOperating Margin(Billions of yen)
19.0
17.0

ing base and increase its market share.
13.5

Outlook

31.0

35.2

34.5

Overview of the Fiscal Year

We anticipate continued growth in unit

8.0

7.8

8.5

In a reflection of better labor market

transaction prices in the existing hous-

22.0

20.7

21.4

conditions and income levels stemminging brokerage market. Accordingly,

from the improvement in businessin the fiscal year ending March 2007,

’02

’03

’04

conditions, the number of transactions

we will continue working to boost our

Operating Income
Operating Margin (%)

in existing homes is increasing. In

market share by opening new offices,addition, the number of transactions inenhancing existing offices, and increas-

properties for investment and in high-ing marketing efficiency with a bolsteredpriced residences increased in the

IT strategy. In addition, in corporate

Number of Transactions
and Transaction Value

year under review, and average actual

brokerage services, we will continue(Billions of yen)prices rose in both the Tokyo andworking to expand our customer base,Osaka areas in the year under review.
In this setting, in our mainstay retail

18

’07

(Forecast)targeting real estate funds, compafurther increasing our revenues. In

increase our name recognition and cus-

this way, we will strive to achieve rev-

tomer-drawing ability by continuing toenue from operations of ¥54.0 billion,

increase the number of directly man-an increase of 9.7%, and operating

aged brokerage offices, which rose toincome of ¥19.0 billion, up 12.0%.

’06

899.7

’07

(Forecast)

928.8

791.5
693.5

684.0

nies, and financial institutions, thereby

brokerage business, we worked to’05

23,968 24,436

’02

’03

26,953’04

Transaction Value
Number of Transactions

27,236 27,943

’05

’06

OUR HISTORY

1949

Izumi Real Estate Co., Ltd., established as the successor to the holding companyof the Sumitomo zaibatsu following the breakup of the conglomerate.

1957

Izumi Real Estate Co., Ltd., changed its name to Sumitomo Realty &Development Co., Ltd.

1963

Merged with the holding company of the former Sumitomo zaibatsu during its
liquidation.

1964

Entered condominium sales business with Hama-Ashiya Mansion in Kobe,
Hyogo Prefecture.

1970

Listed on the Tokyo and Osaka stock exchanges.

1973

Established Sumitomo Fudosan Tatemono Service Co., Ltd., a consolidated
subsidiary.

1974

Completed construction of 52-story Shinjuku Sumitomo Building in Shinjuku,
Tokyo; moved Company headquarters there from Tokyo Sumitomo Building in
Marunouchi, Tokyo.

1975

Established Sumitomo Real Estate Sales Co., Ltd., a consolidated subsidiary.

1980

Established Sumitomo Fudosan Syscon Co., Ltd., a consolidated subsidiary.

1982

Completed construction of 30-story Shinjuku NS Building in Shinjuku, Tokyo;
moved Company headquarters there from Shinjuku Sumitomo Building.

1995

Commenced American Comfort detached housing construction business.

1996

Commenced Shinchiku Sokkurisan remodeling business.

1997

Entered high-quality business hotel market. Opened Villa Fontaine Nihonbashi
and hotels at two other locations.

1998

Sumitomo Real Estate Sales Co., Ltd., a consolidated subsidiary, listed on theTokyo Stock Exchange.

1999

Universal Home Inc., a consolidated subsidiary, listed on JASDAQ (over thecounter with the Japan Securities Dealers Association).

Shinjuku Sumitomo Building

Shinjuku NS Building

Commenced real estate joint investment trust fund. Launched sales of
Sumitomo Realty & Development Fund (SURF) Kudanshita.
2000

Commenced luxury condominium leasing business. Completed construction of
La Tour Shibakoen.

2001

The number of managed STEP brokerage offices exceeded 200.

2002

Completed construction of Izumi Garden Tower (Roppongi 1-chome
Redevelopment Project).
Commenced sales of City Tower series, five high-rise condominiums in Tokyo
and Osaka.

2003

Completed construction of Shinjuku Oak City (Nishi-Shinjuku 6-chome
Redevelopment Project).

2004

Commenced sales of World City Towers.

Izumi Garden Tower

Completed construction of Shiodome Sumitomo Building.
2005

Completed construction of Tokyo Shiodome Building.
Commenced sales of J-Urban III three-story, urban-style houses and J-Urban
Court suburban-style houses.
Completed construction of Sumitomo Fudosan Shin-Akasaka Building in Minato
Ward, Tokyo.

2006

Cumulative total number of orders for Shinchiku Sokkurisan remodeling businesssurpassed 30,000.
Completed WORLD CITY TOWERS Aqua Tower in Minato Ward, Tokyo.
World City Towers

19

CORPORATE GOVERNANCE

Fundamental Approach to Corporate Governance

From the viewpoint of timely disclosure, we provide

To achieve sound management, Sumitomo Realty

important information through our website and otherbelieves that it is important to share information on ameans on a timely basis, and we have increased man-Companywide basis, ensure that everyone is aware ofagement transparency for shareholders, otherproblems, enhance internal management supervision,

investors, and suppliers.

and achieve highly transparent management throughappropriate information disclosure. We have taken aCompliancenumber of steps to implement these practices efficiently.

To further enhance our compliance with laws and regulations and to ensure ethical business practices, weInformation Sharing and Problem Awarenessestablished the Compliance Promotion Committee,

We instituted an executive officer system in April 2004,

which is led by the president. In addition, the Legalwith the objectives of selecting capable young employ-

Department distributes to all Group employees a com-ees and substantially bolstering our administrative sys-pliance FAQ booklet that provides information on suchtems. Currently, in addition to meetings of the board ofmatters as applying corresponding laws on work site

directors, the Executive Officers Committee meets on aissues and preventing compliance-related problems.

monthly basis to discuss important issues and makeWe also implement periodic compliance training ses-decisions rapidly and appropriately.

sions for employees, of which 13 were held in the year

In addition, the board of directors, the Executive

under review.

Officers Committee, and other committees use a variety of means to ensure that information is shared

Independent Auditors

throughout the Company and that everyone is aware of

In accordance with the Commercial Code and the

problems.

Securities Transaction Law, the Company has concluded an auditing contract with KPMG AZSA & Co. for the

Auditing and Internal Control

auditing of the Company’s accounts. There are no con-

To strengthen management oversight, we are working

flicts of interest between Sumitomo Realty and theto enhance our auditing system. We have four statutory

independent auditing company or its employees.

auditors, of whom two are outside statutory auditors,
and to further strengthen our auditing system, at theCompensation of Directors and Statutory Auditors

ordinary general meeting of shareholders held on JuneAt the ordinary general meeting of shareholders held in

29, 2006, the number of outside statutory auditors wasJune 2004, we introduced a new performance-based

increased by one, creating a system of five statutorycompensation system for directors. Under this system,

auditors, including three outside statutory auditors.

the annual compensation for directors is based on the

The statutory auditors attend meetings of the board

Company’s performance. The new system combinesof directors and the Executive Officers Committee,

the three elements that made up the previous sys-and they track internal issues that are important for

tem—monthly compensation, annual bonuses, androbust auditing.

retirement allowances.

The Inspection Department was established to moni-

Under the new system, total annual (July to June)

tor the operational execution of divisions throughout thecompensation for directors is set at 1% of consolidated

Group and the operation of internal control systems.

ordinary profit. (Please refer to the note on page 5.)

The department works to prevent misconduct and mis-

In the year under review, compensation for directors

takes and to support the auditing of the statutory audi-

was ¥681 million and compensation for statutory audi-

tors. We have concluded consultation contracts withtors was ¥51 million.

multiple attorneys in each field, from whom we receive
advice as needed.

20

Financial Section
SIX-YEAR FINANCIAL SUMMARY
Sumitomo Realty & Development Co., Ltd. and its consolidated subsidiaries
Years ended March 31
Millions of yen
2006

2005

2004

2003

2002

2001

For the Year
Revenue from Operations ..................
Leasing ............................................
Sales ................................................
Construction ....................................
Brokerage ........................................

¥646,525
234,280
224,735
135,158
49,217¥616,115
221,234
224,191
127,388
43,445¥573,862
202,776
213,303
125,086
39,809¥533,915
192,979
183,745
124,464
37,577¥497,877
178,034
170,428
115,329
36,184¥459,245
164,575
149,196
113,549
34,881

Cost of Revenue from Operations......

487,805

470,636

435,078

403,777

377,199

349,597

SG&A Expenses .................................
% of Revenue from Operations.......

46,6977.2%

45,1887.3%

42,807
7.5%

41,6267.8%

40,3088.1%

34,430
7.5%

Operating Income...............................
% of Revenue from Operations.......

112,02317.3%

100,291
16.3%

95,97716.7%

88,512
16.6%

80,37016.1%

75,218
16.4%

Depreciation and Amortization ...........

16,33014,01912,211

11,973

10,731

10,377

At Year-End
Current Assets.................................... ¥ 619,219
Sales Inventory* .................................
388,627
Total Assets........................................
2,460,080
Shareholders’ Equity...........................
375,656
Net Interest-Bearing Debt ..................
1,150,880¥ 481,341
260,6132,136,329
320,098
935,155¥ 503,911
234,019
2,090,970
303,875
916,156¥ 423,446
189,136
2,015,667
211,821
1,036,419¥ 404,999
178,450
1,972,735
213,767
1,098,407¥ 374,328
149,215
1,903,529
193,442
1,183,674

Per Share Amounts (Yen)Net Income (Loss) ..............................
Shareholders’ Equity...........................
Cash Dividend Applicable to the Year...

¥ 68.33
790.7410.00¥ 32.64673.409.00¥ 15.34
639.01
9.00¥ 12.22520.84
6.00¥ 56.50525.17
6.00¥ (44.27)
475.51
6.00

Key Ratios
Equity Ratio (%)..................................
ND/E Ratio (Times) .............................

15.3
3.1

15.0
2.9

14.5
3.0

10.5
4.9

10.8
5.1

10.2
6.1

* Sales Inventory = Inventories + Investments in SPCs holding properties for sale

CONTENTSManagement’s Discussion and Analysis

22

Consolidated Balance Sheets

26

Consolidated Statements of Income

28

Consolidated Statements of Shareholders’ Equity

29

Consolidated Statements of Cash Flows30

Notes to Consolidated Financial Statements

31

Independent Auditors’ Report

45

21

MANAGEMENT’S DISCUSSION AND ANALYSIS

leased buildings, making effective use of our assets in our fundraising activities. As a result, for the year under review, our ratioof net interest-bearing debt to operating income was 10.1 times
and our ratio of net interest-bearing debt to equity was 3.1 times,
about one-third and one-half of the respective levels of these ratios
when we began the Four-Year Business Reconstruction Plan.
In strengthening our financial position, our objectives for the
fiscal year ending March 2007, the final year of the current plan,
are to reduce the ratio of net interest-bearing debt to operating
income to less than 8 times and the ratio of net interest-bearing
debt to shareholders’ equity to less than 3 times.
However, accompanying changes in the economic situation
since we formulated the Top Gear Growth Three-Year Plan, we
have increased corporate bonds and borrowings and aggressively acquired sites, and as a result we have decided to scale backour emphasis on achieving the objectives for these ratios. We
decided that, rather than simply achieving short-term numericalobjectives, we should focus several years into the future andemphasize responding flexibly to changes in the operating environment.
Following the increase in capital that we implemented at theend of March 2004 and our strong performance in recent years,
the rating on our long-term bonds was raised to A– by Japan
Credit Rating Agency (JCR) and BBB by Rating and Investment
Information, Inc. (R&I). As a result, we will be able to raise funds
under more favorable terms. Currently, to protect against future
increases in interest rates, we are implementing a shift tolonger-term, fixed-rate interest-bearing debt. Our objective isto further strengthen our financial position, improve our credit
rating, and establish a system that will enable us to raise funds
under more favorable terms.

OVERVIEW
Sumitomo Realty is currently implementing the Top Gear
Growth Three-Year Plan*1, which covers the period through thecurrent fiscal year, ending March 31, 2007. Following the FourYear Business Reconstruction Plan, under which we shook off
the effects of the collapse of Japan’s economic bubble and the
New Three-Year Growth Plan, under which we emphasized higher revenue and profit in a phase of new operational growth, thecurrent plan marks the second stage of operational growth for
the Company. Our basic strategy is to reinforce the course of
growth that we achieved under the Four-Year Business Reconstruction Plan and the New Three-Year Growth Plan and to bolster our financial position.
In the fiscal year ended March 31, 2006, the second year of
our current plan, we continued to achieve higher revenue andprofit in all four principal business segments, recording our ninth
consecutive year of gains in revenue and operating income. Net
income increased for the third consecutive year and set a newrecord high. In addition, we achieved our ordinary profit target
for the final year of the current plan—¥85.0 billion—a year aheadof schedule, and as a result we raised the plan’s final ordinary
profit target to ¥105.0 billion.
In preparation for the institution of mandatory accounting for
impairment losses, four years ago we began to dispose of theassets that we anticipated would be affected by impairment
accounting. In the year under review, we completed the recognition of impairment losses required under the new accounting
standards. Moreover, we will continue to follow a “build-andscrap” strategy*2 to increase the percentage of prime properties
in our portfolio of buildings for leasing.
*1 Please refer to page 6.
*2 Please refer to page 11.

RESULTS OF OPERATIONSFINANCIAL STRATEGY
Revenue from Operations and Operating Income

In our core leasing and sales business segments, significant
advance investment is required. To continue investing in operational growth while controlling interest-bearing debt, we haveworked to diversify our fund-raising methods. Specifically, we
have aggressively introduced development securitization methods using SPCs. In addition, we have formed SURF (Sumitomo
Realty & Development Fund) investment partnerships backed by

Revenue from Operations

Operating Income andOperating Margin

Shareholders’ Equity and Equity Ratio(Billions of yen)(Billions of yen)(Billions of yen)

497.9

533.9

573.9

616.1 646.5

700.0

129.0

’03

’04

’05

’06

’07

(Forecast)

88.5

96.0

100.3

16.7

16.1

16.6

’02

’03

’04

Operating Income
Operating Margin (%)

22

375.7

112.0
80.4

’02

In the fiscal year under review, revenue from operations was
up 4.9%, to ¥646.5 billion. Cost of revenue from operations
rose 3.6%, to ¥487.8 billion, and gross profit increased 9.1%, to¥158.7 billion. The gross margin improved 0.9 percentage points,
to 24.5%. Selling, general and administrative (SG&A) expenses
increased 3.3%, to ¥46.7 billion. As a result, operating income

16.3

’05

17.3

’06

18.4

’07

(Forecast)

213.8

211.8

10.8

10.5

’02

’03

303.9

320.1

14.5

15.0

’04

’05

Shareholders’ Equity
Equity Ratio (%)

15.3

’06

was up 11.7%, to ¥112.0 billion. This performance was supportedby the leasing segment, which benefited from improved vacancy
rates in existing buildings and full-year contributions from buildings opened in the previous fiscal year, and by the brokeragesegment, which recorded a strong performance in existing residences. In addition, the Company made effective efforts torestrain costs accompanying the gain in revenue from operations.

Other Income and Expenses
Net other expenses improved to ¥50.5 billion, from ¥69.6 billion
in the previous fiscal year.
Interest expense, net, which declined substantially due tostable interest rate trends at generally low levels, was down
11.1%, to ¥17.1 billion. As a result of the securitization of 60%of the Shinjuku Sumitomo Building, gain on sale of property andequipment was ¥15.2 billion.
Loss on impairment of fixed assets was ¥25.2 billion, and loss
on devaluation of property and equipment was ¥17.2 billion,
compared with ¥11.9 billion in the previous fiscal year. Loss on
impairment of fixed assets comprises impairment loss accompanying the application of impairment accounting of ¥5.3 billion andimpairment loss of ¥19.9 billion accompanying the reclassification of buildings for lease as buildings for sale. Valuation loss on
fixed assets and impairment loss accompanying the reclassification of buildings represent one facet of our “build-and-scrap”
strategy.

Net Income
Income before income taxes and minority interests totaled ¥61.5
billion, up 100.5% from a year earlier. Income taxes were up
102.4%, to ¥26.3 billion. The effective tax rate was up 0.4 percentage points, to 42.8%. Net income more than doubled, rising109.1%, to ¥32.5 billion, and the net margin increased to 5.0%,
from 2.5% in the previous year.

and minority interests increased and advances received rose, butinvestment in properties for sale (condominiums) increased. As
a result, net cash provided by operating activities declined ¥36.7
billion from the previous year.
Net cash used in investing activities totaled ¥209.7 billion.
Payments for purchases of property and equipment amounted to¥237.0 billion, including about ¥112.0 billion for new development
investment and about ¥72.5 billion for the buyback of 60% ownership as a beneficiary right in the Shinjuku Sumitomo Building.
We re-securitized the Shinjuku Sumitomo Building, generating¥74.3 billion. After the refund of about ¥10.0 billion in deposits
from partnership investors, such as SURF investment partnerships for leased buildings managed by the Company, net cashused in investing activities increased by ¥148.8 billion from theprevious year.
Net cash provided by financing activities was ¥209.3 billion.
Redemption of bonds and notes was ¥92.7 billion, and repaymentof long-term debt was ¥134.9 billion. Proceeds from issuance ofbonds and notes were ¥90.0 billion, and increase in long-term
debt totaled ¥290.2 billion. Short-term debt rose by ¥76.0 billion.

CAPITAL RESOURCES AND FINANCIAL POSITION
AssetsAt the end of the year under review, total assets were ¥2,460.1
billion, an increase of 15.2% from the previous fiscal year-end.
The principal reasons for this increase were higher investmentin properties for sale (condominiums) and increased property andequipment due to investment in leasing facilities. Total current
assets rose 28.6%, to ¥619.2 billion, due primarily to increases
in cash, time and notice deposits; inventories; and deferredincome taxes. Inventories increased 56.6%, to ¥330.7 billion at
the end of the year under review, due in part to a ¥15.6 billion
transfer from tangible fixed assets to inventories. Net property
and equipment rose 9.1%, to ¥1,336.7 billion.

CASH FLOW
Cash and cash equivalents at the end of the year totaled ¥116.2 billion, an increase of ¥12.9 billion from the end of the previous year.
Net cash provided by operating activities was limited to ¥11.4
billion, which was principally attributable to increase in inventories and decrease in notes and accounts receivable–trade. In
comparison with the previous year, income before income taxes

Liabilities
Total liabilities were up 14.7%, to ¥2,069.2 billion. Current liabilities rose 15.7%, to ¥832.5 billion. Long-term debt due within
one year declined 9.5%, to ¥203.7 billion, but short-termborrowing rose 49.0%, to ¥197.8 billion, and commercial paper
increased 27.2%, to ¥51.5 billion. Moreover, long-term liabilities

Net Interest-Bearing Debt,
ND/OP Ratio, and ND/E Ratio

Leasing Assets andReturn on Leasing Assets

Sales Inventory andInventory Turnover(Billions of yen)(Billions of yen)(Billions of yen)

1,098.4

1,150.9
1,036.4
916.2

1,506.1 1,517.7 1,481.8 1,538.5

13.5
11.6
9.2

10.1

3.0

2.9

3.1

’04

’05

’06

9.4
5.1

’02

1,620.0

388.6

935.2
4.5

4.7

4.7

5.0

5.5

0.96

0.97

234.0

260.6

178.5

189.1

0.91

0.86

’02

’03

’04

’05

0.58

4.9

’03

Net Interest-Bearing Debt
ND/OP Ratio (Times)
ND/E Ratio (Times)

’02

’03

’04

’05

Leasing Assets
Return on Leasing Assets (%)

’06

’06

Sales Inventory
Inventory Turnover (%)

23

were up 14.0%, to ¥1,236.7 billion. This increase was principally
attributable to an increase of 3.8% in bonds, to ¥251.6 billion,
and a gain of 41.5% in long-term debt, to ¥562.5 billion.
As a result, at the end of the fiscal year, interest-bearing debt
was up 22.0%, to ¥1,267.0 billion, an increase of ¥228.6 billion.
In addition to upward pressure on land prices stemming from
improved business conditions, we faced heightened concern
about increases in long-term interest rates, which have been
at historically low levels. In consideration of those factors, weundertook aggressive advance investment in building sites,
which are key resources for the Company’s future growth, leading to the increase in debt. In this way, we enhanced shareholders’ equity for the medium to long term.
Specifically, in line with the increase in real estate for sale, theCompany increased short-term debt by ¥76.0 billion, and, in preparation for future increases in interest rates, the Company advanced
long-term, fixed-rate fund-raising. Proceeds from issuance of bonds
and notes were ¥90.0 billion and long-term debt totaled ¥290.2 billion, for a total of ¥380.2 billion, which exceeded the ¥227.6 billion
total of redemption of bonds and notes of ¥92.7 billion and repayment of long-term debt of ¥134.9 billion.
Consolidated interest-bearing debt at the end of the year
under review was 80% long-term, compared with 83% at theend of the previous fiscal year, and 77% fixed-rate, comparedwith 87% at the end of the previous fiscal year. The cancellationof fixed-rate interest rate swap agreements, which had beenleading to relatively high interest costs, was undertaken to
reduce future interest expenses and to increase the percentage
of long-term debt.
Millions of yen
2006

2005

Amountchange%changeShort-term debt:
Principally from banks .......... ¥ 197,770 ¥ 132,745 ¥ 65,025
Commercial paper ................
51,50040,50011,000Subtotal ............................
249,270
173,245
76,025Long-term debt:
Bonds and notes ..................
332,441
335,108–2,667Loans principallyfrom banks .........................
685,321530,036 155,285
Subtotal ............................ 1,017,762
865,144 152,618
Long-term debt due within
one year .............................
203,688
225,182 –21,494
Long-term debt due after
one year .............................
814,074
639,962 174,112
Interest-bearing debt............ 1,267,032 1,038,389 228,643

Total Assets

49.0
27.2
43.9
–0.8
29.3
17.6
–9.5
27.2
22.0

Shareholders’ Equity
Shareholders’ equity was up 17.4% from the end of the previous
fiscal year, to ¥375.7 billion, due primarily to higher retained
earnings stemming from the increase in net income and to anincrease in net unrealized holding gains on securities. As aresult, the shareholders’ equity ratio increased to 15.3%, from
15.0%.
ROE rose to 9.3%, from 5.0% a year earlier, and ROA was up
from 4.8% to 5.0%.

DIVIDEND POLICY
Our fundamental policy for the distribution of profits is to maintain a stable base level of dividends, without regard to revenue,
and, while retaining a sufficient level of earnings for operational
growth, to increase dividends in line with growth in profits.
Under the two previous management plans—the Four-YearBusiness Reconstruction Plan, under which we dealt with theeffects of the collapse of Japan’s economic bubble, and the
New Three-Year Growth Plan, under which we steadily strengthened our profit foundation—we also worked to respond to various changes in accounting standards and to reduce unrealized
losses. Over this period, due to comparatively large special losses, net income fluctuated, but we maintained annual dividends
at ¥6.00 per share. As a result, we completed the implementation of measures to deal with unrealized losses, and, under thecurrent Top Gear Growth Three-Year Plan, we have been able tolay the foundation for full-scale growth in EPS. Accordingly, we
have started to increase dividends.
In the year under review, in a reflection of these initiatives, net
income per share rose to ¥68.33, from ¥32.64 in the previous
fiscal year, and shareholders’ equity per share rose to ¥790.74,
from ¥673.40 per share in the previous fiscal year. In addition, in
consideration of the favorable progress in the implementation of
the current management plan, we increased annual per-share
cash dividends to ¥10.00, including the ¥5.00 interim dividend,
representing an increase of ¥1.00 per share from the previous
fiscal year.
In the fiscal year ending March 2007, we are forecasting an
increase of 20% in ordinary profit, and accordingly we plan toincrease dividends by ¥2.00 per share, to ¥12.00 for the year.

Number of Employees
in Major Segments

ROE and ROA(Billions of yen)(%)
2,460.1

2,091.0 2,136.3
1,972.7 2,015.7

5,815

5,815

6,348

6,621

6,926

11.3
9.3

4.2

4.5

4.7

4.8

5.0

5.0

’02

’03

’04

’05

’06

’02
Leasing
Sales

24

’03

’04

’05

Construction
Brokerage

’06

’02
ROE
ROA

2.3

2.5

’03

’04

’05

’06

SPCS
Investments in SPCs include properties for sale and those to beheld for leasing. The former are recorded in the current assets
section of the balance sheet as investments in SPCs holding
properties for sale, while the latter are recorded in the investments and advances section of the balance sheet as investments in securities and other. When properties for sale are sold,the proceeds are recorded as revenue in the sales business segment. As of March 31, 2006, investments in SPCs holding properties for sale totaled ¥57.9 billion and the balance of properties
held for leasing was ¥61.1 billion.
The SPC leasing property revenue structure comprises fourstages. The Company leases buildings and then subleases totenants, and as a result rent payments from tenants are recorded as leasing revenue by Sumitomo Realty. The Company masterleases the tenants from the SPC and then makes payment to
the SPC, recording the payment as cost of leasing. The SPC
records the payment from Sumitomo Realty as rent received;
deducts expenses, such as fixed asset taxes, insurance premiums, depreciation and amortization, and interest on nonrecourse loans; and pays the remainder to Sumitomo Realty as
dividends. Sumitomo Realty records the dividend payments asleasing sales.

SURF
In investment partnerships, for SURF, an investment scheme
for office buildings in Japan that is similar to a U.S.-style limited
partnership, Sumitomo Realty acts as general partner. In accordance with Japanese accounting standards for such associations, all revenue and expenses are recorded on the Company’s
income statements. Dividends to partnership investors arerecorded as other expenses. On the balance sheets, the properties are recorded under fixed assets, and payments frominvestors are recorded under fixed liabilities as long-term
deposits. By the end of March 2006, the SURF investment had
grown into a large-scale investment product, with ¥184.8 billion
in investment received.

BACKGROUND
Sumitomo Realty was formed from the dissolution of theSumitomo zaibatsu, one of the four major family-dominatedfinancial and industrial combines that had largely controlled theJapanese economy until the end of World War II. Inheriting therespected Sumitomo brand, each Sumitomo company became
an independent entity. Sumitomo Realty was incorporated in1949 within the Sumitomo Group to manage the residual realestate assets of the zaibatsu. The brand name, however, was
one of the few assets the Company inherited. At the time of its
founding, in terms of assets, Sumitomo Realty was far behind
the two giants in the domestic real estate industry—Mitsubishi
Estate, which became heir to the entire Marunouchi area, andMitsui Fudosan, which took over the real estate business of the

Mitsui zaibatsu. Sumitomo Realty, which recorded growth as acondominium developer, did not have stable sources of revenue,
such as those from leasing. As a result, the oil shock of the
1970s resulted in a management crisis for the Company, which
subsequently began to expand its leasing operations. However,the bursting of Japan’s economic bubble in the early 1990s led
to a second crisis for Sumitomo Realty. As a result of thesecrises, the Company was unable to accumulate capital, and, incomparison with its major competitors, its financial position was
significantly weaker. However, Sumitomo Realty’s growth strategy requires capital for leasing and sales, which are capital intensive, and accordingly the Company has taken steps to enhance
its capital structure.

OPERATING RISKS
Sumitomo Realty’s operations are subject to the following risks
that might influence the judgment of investors.

1. Changes in the operating environment
Leasing, sales, construction, and brokerage operations areaffected by such factors as economic trends, corporate performances, personal incomes, land price trends, interest rates andother financial matters, and housing taxes, and these factors
could influence the Group’s results of operations and financial
position.

2. Increase in supply
An increase in new buildings, an increase in new condominium
units, an increase in competitors, or other factors resulting in
an increase in overall supply and intensified competition could
affect the Group’s leasing, sales, construction, and brokerage
operations and the Group’s results of operations and financial
position.

3. Legal regulations
The operations conducted by the Group are covered by a rangeof legal regulations, and revision could affect the Group’s resultsof operations and financial position. The principal laws affecting
the Group are the Building Lots and Building Transactions
Business Law, the Construction Law, the Leased Land andHouse Lease Law, the Building Standards Law, the Urban
Planning Law, the Urban Redevelopment Law, the Law for
Compartmented-Ownership, etc., of Buildings, and the National
Land Use Planning Law.

4. Natural or man-made disasters
In the event of earthquakes, damage from natural disasters,such as wind or flood damage, accidents, fires, or man-madedisasters, such as terrorist incidents, etc., the Group’s resultsof operations and financial position could be affected.

5. Major lawsuits
In regard to the rent on office buildings leased by the Company,
one request for rent reductions in accordance with the Leased
Land and House Lease Law is currently in litigation.

25

CONSOLIDATED BALANCE SHEETS
Sumitomo Realty & Development Co., Ltd. and its consolidated subsidiaries
As of March 31, 2006 and 2005

Millions of yen

Assets2006
Current assets:Cash, time and notice deposits (Note 3) .......................................................... ¥ 116,153
Marketable securities (Note 7) .........................................................................
703
Investments in SPCs holding properties for sale (Note 7)................................
57,927
Notes and accounts receivable–trade ..............................................................
26,240Loans receivable...............................................................................................
61,994
Allowance for doubtful accounts......................................................................
(25,064)
Inventories (Note 4)..........................................................................................
330,700
Deferred income taxes (Note 15) .....................................................................
18,380
Other current assets ........................................................................................
32,186
Total current assets .....................................................................................
619,219

Investments and advances:
Investments in and advances to unconsolidated
subsidiaries and affiliates (Note 5)..................................................................
Investments in securities and other (Note 7) ...................................................
Allowance for doubtful accounts......................................................................
Total investments and advances .................................................................
Property and equipment (Note 6):
Land..................................................................................................................
Buildings and structures...................................................................................
Machinery and equipment................................................................................
Construction in progress ..................................................................................
Accumulated depreciation................................................................................
Net property and equipment........................................................................

Other assets:
Guarantee and lease deposits paid to lessors..................................................
Leasehold rights and other intangible assets ...................................................
Deferred income taxes (Note 15) .....................................................................
Other ................................................................................................................
Total other assets ........................................................................................

See accompanying notes.

26

Thousands of
U.S. dollars(Note 1)

2005

¥ 103,235
1,203
49,434
31,462
56,844(23,591)
211,180
6,410
45,164
481,3412006$

988,704
5,984
493,080
223,357
527,698(213,347)
2,814,947
156,452
273,971
5,270,846

6,110
272,005(21,409)
256,706

5,901
196,741(21,206)
181,436

52,0092,315,330(182,235)
2,185,104

1,013,232
417,503
18,07630,642
1,479,453(142,761)
1,336,692

936,003403,732
17,2942,840
1,359,869(134,275)
1,225,594

8,624,719
3,553,822
153,865
260,827
12,593,233(1,215,194)
11,378,039

192,008
49,7092,909
2,837
247,463¥2,460,080

182,354
55,7702,958
6,876
247,958¥2,136,329

1,634,389
423,127
24,762
24,1482,106,426$20,940,415

Thousands of
U.S. dollars(Note 1)Millions of yen

Liabilities and Shareholders’ Equity
Current liabilities:
Short-term debt (Note 8) .................................................................................. ¥Long-term debt due within one year (Note 8) ..................................................
Notes and accounts payable–trade ..................................................................
Accrued income taxes (Note 15) ......................................................................
Accrued bonuses..............................................................................................
Deposits received (Note 16).............................................................................
Other current liabilities .....................................................................................
Total current liabilities ..................................................................................

2006

2005

2006

249,270
203,688
55,30432,556
2,916
210,645
78,080832,459¥ 173,245
225,182
45,005
7,799
2,941
193,872
71,204
719,248$ 2,121,808
1,733,810
470,752
277,120
24,821
1,793,029
664,624
7,085,964

Long-term liabilities:
Long-term debt due after one year (Note 8).....................................................
Guarantee and deposits received (Note 16) .....................................................
Deferred income taxes (Note 15) .....................................................................
Allowance for employees’ severance and retirement benefits (Note 9) ..........
Other long-term liabilities (Note 14) .................................................................
Total long-term liabilities ..............................................................................

814,074
382,51231,4194,934
3,793
1,236,732

639,962
427,818
8,249
5,002
3,487
1,084,518

6,929,469
3,255,975
267,441
41,99932,286
10,527,170

Minority interests .............................................................................................

15,233

12,465

129,665

122,805
132,748
75,652331,205
Net unrealized holding gains on securities .......................................................
46,900Foreign currency translation adjustments ........................................................
(1,214)
Treasury stock ..................................................................................................
(1,235)
Total shareholders’ equity............................................................................
375,656¥2,460,080

122,805
132,748
49,829305,382
18,964(3,583)(665)
320,098¥2,136,329

1,045,327
1,129,963
643,956
2,819,246
399,217(10,334)(10,513)
3,197,616$20,940,415

Contingent liabilities (Note 21)

Shareholders’ equity (Note 17):
Common stock:
Authorized – 1,900,000 thousand shares(780,000 thousand shares in 2005)
Issued– 476,086 thousand shares..........................................................
Capital surplus ..................................................................................................
Retained earnings.............................................................................................

27

CONSOLIDATED STATEMENTS OF INCOME
Sumitomo Realty & Development Co., Ltd. and its consolidated subsidiaries
For the years ended March 31, 2006, 2005 and 2004
Thousands of
U.S. dollars(Note 1)Millions of yen
2006

2005

2004

2006

¥616,115¥573,862$5,503,277

470,636
45,188515,824
100,291

435,078
42,807
477,885
95,977

4,152,239
397,489
4,549,728
953,549(19,219)965—(8,726)—(11,886)(23,266)
705
—
—
—
—

(145,429)
12,087
129,707(213)(214,879)(146,280)(15,672)
(711)
121
(715)
(4,667)———(3,481)(2,270)(3,339)(69,600)
30,691(49,414)
(539)
(286)
(144)
(3,889)—————(3,561)(80,394)
15,583—(1,847)
12,308(579)(40,024)
14,471(11,091)(21,348)——(16,581)(429,698)
523,851

7,414
5,592
13,006

1,036
6,334
7,370

290,390(66,267)
224,123

2,706

2,137

1,893

23,034

Net income ............................................................................................ ¥ 32,506¥ 15,548

6,320$ 276,694

Revenue from operations .................................................................... ¥646,525
Costs and expenses:
Cost of revenue from operations ......................................................... 487,805
Selling, general and administrative expenses ......................................
46,697534,502
Operating income ................................................................................. 112,023
Other income (expenses):
Interest expense, net ........................................................................... (17,085)
Dividend income...................................................................................
1,420
Gain on sale of property and equipment (Note 13) ..............................
15,238Loss on sale of property and equipment ..............................................
(25)
Loss on impairment of fixed assets (Note 10) ..................................... (25,244)
Loss on devaluation of property and equipment (Note 12) .................. (17,185)
Loss on sale and devaluation of property
and equipment (Note 11)....................................................................
—
Loss on disposal of property and equipment .......................................
(217)
Gain (Loss) on sale of investments in securities ..................................
1,446
Loss on devaluation of investments in securities ................................
(68)
Dividend to partnership investors.........................................................
(4,702)Gain on settlement of sub-lease lawsuits ............................................
1,700
Loss on liquidation of silent partnership (Note 13) ...............................
(1,303)
Loss on cancellation of interest rate swap agreement ........................
(2,508)Loss on sale of loans receivable...........................................................
—
Directors’ retirement benefits (Note 14) ..............................................
—
Other, net .............................................................................................
(1,948)(50,481)
Income before income taxes and minority interests ........................
61,542
Income taxes (Note 15):
Current .................................................................................................
34,115
Deferred ...............................................................................................
(7,785)
Total ...................................................................................................
26,330Minority interests .................................................................................

¥

U.S. dollars(Note 1)

Yen

Amounts per share of common stock:
Net income:– Basic ..................................................................................................
– Diluted ...............................................................................................
Cash dividend applicable to the year ....................................................
See accompanying notes.

28¥68.33—10.00¥32.64
32.64
9.00¥15.34
—
9.00

$0.58
—
0.09

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Sumitomo Realty & Development Co., Ltd. and its consolidated subsidiaries
For the years ended March 31, 2006, 2005 and 2004
Thousands
Number ofshares ofcommonstock

Balance at March 31, 2003..................... 407,086
Net income ............................................
—
Foreign currency translation adjustments ...
—Net unrealized holding gains
on securities.........................................
—
Issuance of common stock.................... 69,000
Treasury stock........................................
—
Gains on sale of treasury stock..............
—
Decrease due to merger ofconsolidated subsidiaries .....................
—Cash dividends paid:
Final for prior year (¥6 per share) .........
—
Balance at March 31, 2004..................... 476,086
Net income ............................................
—
Foreign currency translation adjustments ...
—Net unrealized holding gains
on securities.........................................
—
Treasury stock........................................
—
Gains on sale of treasury stock..............
—
Increase due to merger ofconsolidated subsidiaries .....................
—Cash dividends paid:
Final for prior year (¥9 per share) .........
—
Bonuses to directors..............................
—
Balance at March 31, 2005..................... 476,086
Net income ............................................
—
Foreign currency translation adjustments ...
—Net unrealized holding gains
on securities.........................................
—
Treasury stock........................................
—Cash dividends paid:
Final for prior year (¥9 per share) .........
—
Interim for current year (¥5 per share).....
—
Bonuses to directors..............................
—
Balance at March 31, 2006..................... 476,086

Millions of yen

Commonstock

CapitalsurplusRetainedearnings

Net unrealized
holding gains(losses) on
securities¥ 86,787——¥ 96,822——¥34,693
6,320—¥ (4,886)——¥ (1,370)—(2,892)¥ (225)———36,018———35,921
—
1

—
—
—
—

19,306
—
—
—

—
—
—
—

—
—
(179)
—

—

—

(1)

—

—

—

—
122,805———
132,744——(2,440)38,572
15,548——14,420———(4,262)
—
679

—
(404)
—
—

—
—
—

—
—
4

—
—
—

4,544
—
—

—
—
—

—
(261)
—

—

—

13

—

—

—

—
—
122,805————
132,748——(4,280)(24)
49,82932,506———
18,964————(3,583)
—
2,369

—
—
(665)
—
—

—
—

—
—

—
—

27,936
—

—
—

—
(570)

—
—
—
¥122,805———¥132,748(4,278)(2,376)(29)¥75,652———¥46,900———¥(1,214)———¥(1,235)

Foreign currencytranslation
adjustments

Treasurystock

Thousands of U.S. dollars (Note 1)

Commonstock

CapitalsurplusRetainedearnings

Net unrealized
holding gains(losses) on
securities

Balance at March 31, 2005..................................... $1,045,327 $1,129,963 $424,149 $161,423
Net income ............................................................
—— 276,694—
Foreign currency translation adjustments..................
————Net unrealized holding gains
on securities ........................................................
———
237,794
Treasury stock .......................................................
————Cash dividends paid:
Final for prior year ($0.08 per share)....................
——(36,415)—Interim for current year ($0.04 per share)............
——(20,225)—
Bonuses to directors..............................................
—
—
(247)
—
Balance at March 31, 2006..................................... $1,045,327 $1,129,963 $643,956 $399,217

Foreign currencytranslation
adjustments

Treasury
stock$(30,499) $ (5,661)——
20,165————(4,852)

—
—
—
—
—
—
$(10,334) $(10,513)

See accompanying notes.

29

CONSOLIDATED STATEMENTS OF CASH FLOWS
Sumitomo Realty & Development Co., Ltd. and its consolidated subsidiaries
For the years ended March 31, 2006, 2005 and 2004
Thousands of
U.S. dollars(Note 1)Millions of yen
2006

2005

2004

2006

¥ 30,691
14,019—(17,321)¥ 15,583
12,211—(2,906)$ 523,851
139,002214,879
14,156254
15,672—
8,726
11,886
711
(121)
715
(1,390)19,644(4,961)
4,787(20,004)
29,192(26,994)
6,688(4,563)
67,631437
49,414
—
—
—
539
286
144
(983)
23,544(16,492)(11,361)(22,032)
7,533
17,224(2,337)(15,312)55,492(579)—(129,707)
213
146,280
1,847(12,308)579(16,828)
150,170(72,293)
44,586(919,493)(41,318)
87,513
102,426
78,507
311,483

1,974(17,545)(9,665)
11,357

1,489(19,870)(1,219)48,031

963(23,663)
825
33,617

16,803(149,345)(82,269)
96,672

Cash flows from investing activities:
Payments for purchases of property and equipment......................... (237,024)
Proceeds from sale of property and equipment.................................
91,055
Payments for purchases of investments in securities ....................... (75,303)
Proceeds from sale of investments in securities ...............................
36,546
Payments for investments in SPC and partnership............................
—
Reduce capital in SPC and partnership ..............................................
—
Payments for guarantee and lease deposits paid to lessors.............. (24,588)
Proceeds from guarantee and lease deposits paid to lessors............
10,065
Payments for guarantee and lease deposits received ....................... (37,572)
Proceeds from guarantee and lease deposits received .....................
28,990Receipts of deposits from partnership investors ...............................
65,508Restitution of deposits from partnership investors............................ (75,559)
Other, net...........................................................................................
8,223
Net cash used in investing activities .................................................... (209,659)(106,784)
21,902(9,315)1,561(7)—(5,341)
7,052(46,598)
34,761
111,474(67,590)(1,935)(60,820)(34,189)
18,095(21,966)768(10,325)
8,000(8,334)
5,489(36,062)
25,852112,943(76,248)3,469(12,508)(2,017,569)
775,068(640,986)
311,083——(209,295)
85,674(319,816)
246,765
557,610(643,165)
69,995(1,784,636)

Cash flows from financing activities:
Increase (Decrease) in short-term debt..............................................
Proceeds from issuance of bonds and notes.....................................
Redemption of bonds and notes........................................................
Increase in long-term debt .................................................................
Proceeds from issuance of common stock........................................
Increase (Decrease) in assignment of receivables.............................
Cash dividends paid ...........................................................................
Other, net...........................................................................................
Net cash provided by (used in) financing activities...............................

76,02590,000(92,667)
155,285—(40,310)(7,159)28,125
209,299(32,178)
80,000(77,523)
19,461—
15,219(4,581)(16,658)(16,260)(87,428)
85,000(114,209)
27,14871,940(6,432)(2,696)44,10017,423647,131
766,088(788,790)
1,321,799—(343,122)(60,938)
239,403
1,781,571

Effect of exchange rate changes on cash and cash equivalents ..........

1,922

(160)

(1,763)

16,361

Net increase (decrease) in cash and cash equivalents......................
12,919Cash and cash equivalents at beginning of year ............................... 103,237
Cash and cash equivalents of subsidiaries excluded
from consolidation .............................................................................
—
Change in cash and cash equivalents due to mergerof consolidated subsidiaries ..............................................................
—Cash and cash equivalents at end of year (Note 3) ............................ ¥116,156(29,209)
132,476

36,76995,703109,968
878,762

(31)

—

—

1
¥103,237

4¥132,476—$ 988,730

Cash flows from operating activities:
Income before income taxes and minority interests ............................ ¥ 61,542
Depreciation and amortization............................................................
16,330Loss on impairment of fixed assets (Note 10) ...................................
25,244
Provision for (Reversal of) allowance for doubtful accounts ..............
1,663
Increase (Decrease) in employees’ severance
and retirement benefits ...................................................................
(68)
Loss on sale and devaluation of property and equipment (Note 11) ....
—
Gain on sale of property and equipment (Note 13) ............................ (15,238)
Loss on sale of property and equipment............................................
25
Loss on devaluation of property and equipment (Note 12) ................
17,185
Loss on disposal of property and equipment .....................................
217
Loss (Gain) on sale of investments in securities................................
(1,446)
Loss on devaluation of investments in securities ..............................
68
Interest and dividend income.............................................................
(1,977)
Interest expense ................................................................................
17,642
Increase in investments in SPCs holding properties for sale .............
(8,493)
Decrease (Increase) in notes and accounts receivable–trade ............
5,238
Increase in inventories ....................................................................... (108,022)
Decrease (Increase) in loans receivable .............................................
(4,854)
Increase (Decrease) in notes and accounts payable–trade ................
10,281
Increase (Decrease) in advances received .........................................
12,033
Other, net...........................................................................................
9,223
Total .................................................................................................
36,593
Proceeds from interest and dividend income ....................................
Payments for interest.........................................................................
Receipts (Payments) for income tax and other taxes ........................
Net cash provided by operating activities.............................................

30

See accompanying notes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sumitomo Realty & Development Co., Ltd. and its consolidated subsidiaries
As of and for the years ended March 31, 2006, 2005 and 2004

1. BASIS OF FINANCIAL STATEMENTS
The accompanying consolidated financial statements of
Sumitomo Realty & Development Co., Ltd. (the “Company”)
have been prepared in accordance with the provisions set forthin the Japanese Securities and Exchange Law and its related
accounting regulations, and in conformity with accounting principles generally accepted in Japan (“Japanese GAAP”), which are
different in certain respects as to application and disclosure
requirements of International Financial Reporting Standards.
The accounts of overseas subsidiaries are based on their accounting records maintained in conformity with generally accepted accounting principles prevailing in the respective countries of
domicile. The accompanying consolidated financial statements
have been restructured and translated into English (with some
expanded descriptions and the inclusion of consolidated statements of shareholders’ equity) from the consolidated financial

statements of the Company prepared in accordance withJapanese GAAP and filed with the appropriate Local Finance
Bureau of the Ministry of Finance as required by the Securities
and Exchange Law. Some supplementary information includedin the statutory Japanese language consolidated financial statements, but not required for fair presentation, is not presented in
the accompanying consolidated financial statements.
The translation of the Japanese yen amounts into U.S. dollars
is included solely for the convenience of readers outside Japan,
using the prevailing exchange rate at March 31, 2006, whichwas ¥117.48 to U.S.$1. The convenience translations should not
be construed as representations that the Japanese yen amounts
have been, could have been, or could in the future be, converted
into U.S. dollars at this or any other rate of exchange.

2. ACCOUNTING POLICIES(1) Principles of consolidation
All companies are required to consolidate all significant investees
which are controlled through substantial ownership of majority
voting rights or existence of certain conditions.
The accompanying consolidated financial statements include
the accounts of the Company and significant companies overwhich the Company has power of control through majority voting rights or existence of certain conditions evidencing control
by the Company.
In the elimination of investments in subsidiaries, the assets
and liabilities of the subsidiaries, including the portion attributable
to minority shareholders, are recorded based on the fair value
at the time the Company acquired control of the respective
subsidiaries.
All significant intercompany balances, transactions and profits
have been eliminated in consolidation.
(2) Foreign currency translation
Receivables and payables denominated in foreign currencies aretranslated into Japanese yen at the year-end rates.
Financial statements of consolidated overseas subsidiaries
are translated into Japanese yen at the year-end rate, exceptthat shareholders’ equity accounts are translated at historicalrates and income statement items resulting from transactions
with the Company at the rates used by the Company.
Differences arising from translation are presented as “Foreign
currency translation adjustments” in shareholders’ equity.
(3) Cash and cash equivalents
In preparing the consolidated statements of cash flows, cashon hand, readily-available deposits and short-term, highly liquid
investments with maturities not exceeding three months at thetime of purchase are considered to be cash and cash equivalents.
(4) Recognition of revenue
Revenues from sales of land and residential houses are recognized when units are delivered and accepted by customers.
Revenues from leasing of office space, shops and apartments
are recognized as rent accrues over the lease term.

(5) Inventories
Inventories are stated at cost which is determined by the specific identification cost method.
With respect to the cost of consignment sales activities, theCompany uses a cost accounting approach for matching revenue
from sales of consigned properties and costs associated to suchproperties.
(6) Securities
Held-to-maturity securities are stated at amortized cost.
Investments in subsidiaries and affiliates that are not consolidated or accounted for using the equity method are stated at moving-average cost. Available-for-sale securities with available fairmarket values are stated at fair market value. Unrealized gains
and unrealized losses on these securities are reported, net of
applicable income taxes, as a separate component of shareholders’ equity. Realized gains and losses on sale of such securities
are computed using moving-average cost.
Investments in SPCs holding properties for sale and seniorsecurities are stated at cost determined by the specific identification method and securities with no available fair market value
are stated at moving-average cost.
Investments in partnerships similar to investment limited
partnerships, which are regarded as securities under the
Securities and Exchange Law, are accounted for in a manner
similar to the equity method based on recent financial statements.
If the market value of held-to-maturity securities, investments
in subsidiaries and affiliates, available-for-sale securities andinvestments in SPCs holding properties for sale declines significantly, such securities are stated at fair market value and the difference between fair market value and the carrying amount isrecognized as a loss in the period of the decline. If the fair market value of investments in unconsolidated subsidiaries and affiliated companies not accounted for using the equity method is
not readily available, such securities should be written down to
net asset value with a corresponding charge in the income statement in the event net asset value declines significantly. In thesecases, such fair market value or the net asset value will be thecarrying amount of the securities at the beginning of thenext year.
31

(7) Property and equipment
The Company and consolidated domestic subsidiaries depreciatebuildings using the straight-line method, and other property andequipment using the declining-balance method over their estimated useful lives. Consolidated overseas subsidiaries depreciate property and equipment using primarily the straight-line
method in accordance with the accounting principles in therespective countries.
Estimated useful lives used in the computation of depreciation are generally as follows:
Buildings and structures............................. 6 to 60 years
Machinery and equipment ......................... 2 to 20 years(8) Impairment of fixed assets
Effective April 1, 2005, the Company and its consolidated
domestic subsidiaries applied “Accounting Standards for
Impairment of Fixed Assets” (“Opinion Concerning Establishmentof Accounting Standard for Impairment of Fixed Assets”, issued
by the Business Accounting Deliberation Council on August 9,2002) and “Guidelines on Implementation of Accounting Standard
for Impairment of Fixed Assets” (Guidelines on Implementationof Business Accounting Standard No. 6 issued by the AccountingStandards Board of Japan on October 31, 2003). As a result of
adopting the new accounting standards for impairment of fixed
assets, income before income taxes for the year ended March
31, 2006 decreased by ¥25,244 million ($214,879 thousand).
Accumulated impairment losses are recognized as direct
write-downs of the related fixed assets.
(9) Software costs
Software costs are amortized using the straight-line method overthe estimated useful lives (five years).
(10) Allowance for doubtful accounts
The Company and its consolidated subsidiaries provide for
doubtful accounts at an estimated uncollectable amount basedon the evaluation of certain identified doubtful and bankrupt
receivables plus an amount calculated using the percentage ofactual collection losses in certain reference periods with respect
to remaining receivables.
(11) Finance leases
Finance leases, except those leases for which the ownership ofthe leased assets is considered to be transferred to the lessee,
are accounted for in the same manner as operating leases.
(12) Income taxes
Income taxes are provided for on the basis of income for financial statement purposes. The tax effects of temporary differences between the carrying amounts of assets and liabilities forfinancial statements and income tax purposes are recognized asdeferred income taxes.
(13) Employees’ severance and retirement benefits
The Company and certain of its consolidated subsidiaries provide
two types of post-employment benefit plans, lump-sum payment
plans and approved retirement pension plans, under which all
eligible employees are entitled to benefits based on their current
32

rate of pay, length of service and the conditions under which termination occurs.
The liabilities and expenses for severance and retirement benefits are determined based on the amounts actuarially calculatedusing certain assumptions.
The Company and certain of its consolidated subsidiaries
provided an allowance for employees’ severance and retirement
benefits at March 31, 2006, 2005 and 2004 based on the estimated projected benefit obligation at those dates.
Actuarial gains and losses are recognized in expenses in the
succeeding period.
(14) Derivative transactions and hedge accounting
The Company and its consolidated subsidiaries state derivative
financial instruments at fair value and recognize changes in thefair value as gains or losses unless derivative financial instruments are used for hedging purposes and qualify for hedge
accounting.
If derivative financial instruments are used as hedges andmeet certain hedging criteria, the Company and its consolidated
subsidiaries defer recognition of gains or losses resulting fromchanges in fair value of derivative financial instruments until the
related losses or gains on the hedged items are recognized.
However, in cases where forward foreign exchange contracts
are used as hedges and meet certain hedging criteria (regarding
foreign exchange contracts), the forward foreign exchange contracts and hedged items are accounted for in the following manner:
1. If a forward foreign exchange contract is executed tohedge an existing foreign currency receivable or payable,(a) the difference, if any, between the Japanese yen amountof the hedged foreign currency receivable or payable translated using the spot rate at the inception date of the contract and the book value of the receivable or payable isrecognized in the income statement in the period which
includes the inception date; and(b) the discount or premium on the contract (that is, the difference between the Japanese yen amount of the contract
translated using the contracted forward rate and thattranslated using the spot rate at the inception date of thecontract) is recognized over the term of the contract.
2. If a forward foreign exchange contract is executed tohedge a future transaction denominated in a foreign currency, the future transaction will be recorded using the contracted forward rate, and no gains or losses on the forward
foreign exchange contract are recognized.
Also, if interest rate swap contracts are used as a hedge andmeet certain hedging criteria (regarding interest rate swap contracts), the net amount to be paid or received under the interest
rate swap contracts is added to or deducted from the interest on
the assets or liabilities relative to which the swap contract was
executed as a hedge.
(15) Amounts per share of common stock
The computation of net income per share is based on theweighted-average number of shares of common stock outstanding during each year.

Diluted net income per share is computed based on theamount of net income available to the shareholders and theweighted-average number of shares of common stock outstanding during each year after giving effect to the dilutive potentialof shares of common stock to be issued upon the exercise ofstock options.
Cash dividends per share represent actual amounts applicableto the respective year.

(16) Reclassifications
Certain prior year amounts have been reclassified to conformto the 2006 presentation.
These changes had no impact on previously reported resultsof operations.

3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at March 31, 2006 and 2005 consisted of the following:
Millions of yen
2006
2005

Cash, time and notice deposits ...................................................................................................
Marketable securities .................................................................................................................
Cash and cash equivalents .........................................................................................................

¥116,153
3¥116,156¥103,235
2¥103,237

Thousands of
U.S. dollars
2006$988,704
26$988,730

4. INVENTORIESInventories at March 31, 2006 and 2005 were as follows:
Millions of yen
2006
2005

Land and buildings for sale .........................................................................................................
Land and building projects in progress ........................................................................................
Land held for development..........................................................................................................
Other............................................................................................................................................

¥127,585
89,669107,614
5,832¥330,700¥106,190
63,651
36,396
4,943¥211,180

Thousands of
U.S. dollars
2006$1,086,015
763,270916,020
49,642$2,814,947

The Company transferred property and equipment to inventories. Such transfer at March 31, 2006 is as follows:

Millions of yen
2006

Thousands of
U.S. dollars
2006¥ 15,594$ 132,737¥(15,594)$(132,737)

Inventories:
Transferred from property and equipment ..................................................................................................
Property and equipment:
Transferred to inventories ...........................................................................................................................

5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARIES AND AFFILIATES
Investments in and advances to unconsolidated subsidiaries and affiliates at March 31, 2006 and 2005 consisted of the following:
Millions of yen
2006
2005

Investments in common stock, at cost................................................................................................... ¥5,991
Advances.................................................................................................................................................
119¥6,110¥5,412489¥5,901Thousands of
U.S. dollars
2006$50,996
1,013$52,00933

6. PROPERTIES IN TRUSTThe Company has properties which were held under real estate trust contracts.
Such properties included in property and equipment in the consolidated balance sheets at March 31, 2006 and 2005 wereas follows:
Thousands of
U.S. dollars
2006

Millions of yen
2006
2005

Land......................................................................................................................................................
Buildings and structures .......................................................................................................................
Machinery and equipment....................................................................................................................

¥—
—
—
¥—

¥1,2361,031
1¥2,268$———$—

7. SECURITIESFor 2006
A. The following tables summarize the acquisition costs, book values and fair market values of securities with available fair market
values as of March 31, 2006:(a) Held-to-maturity securities:
Millions of yen
Fair market
Book value
value
Difference

Securities whose fair market value exceeds book value:
National and local government bonds........................................
Securities whose fair market value does not exceed book value:
National and local government bonds........................................
Total ...............................................................................................

¥

—

1,206
¥1,206¥

Thousands of U.S. dollars
Fair market
Book value
value
Difference

—

¥ —

$

—

1,190
¥1,190(16)¥(16)

10,265$10,265$—$

10,129$10,129—(136)$(136)(b) Available-for-sale securities:
Millions of yen

Securities whose book value exceeds acquisition cost:
Equity securities .........................................................................
Others.........................................................................................
Subtotal ......................................................................................
Securities whose book value does not exceed acquisition cost:
Equity securities .........................................................................
Others.........................................................................................
Subtotal ......................................................................................
Total ...............................................................................................

Acquisition
cost

Book value

Difference

Thousands of U.S. dollars
Acquisition
cost
Book value Difference¥77,848
582
78,430¥156,937
608
157,545¥79,089
26
79,115$662,649
4,954
667,603$1,335,861 $673,212
5,176
222
1,341,037 673,434

9,989
—
9,989
¥88,419

9,442
—
9,442
¥166,987

(547)
—
(547)
¥78,568

85,027—85,027$752,630

80,371(4,656)——80,371(4,656)$1,421,408 $668,778

B. The following table summarizes the book values of securities with no available fair market values as of March 31, 2006:
Available-for-sale securities:
Book value
Thousands ofMillions of yen
U.S. dollars

Unlisted equity securities..............................................................................................................................
Senior securities ...........................................................................................................................................
Investment in partnerships similar to investment limited partnerships ........................................................
Total

¥

7,108
86,16542,072¥135,345$

60,504
733,444
358,121$1,152,069

Senior securities included investments in SPCs holding properties for sale amounting to ¥57,927 million ($493,080 thousand).
C. Available-for-sale securities with maturities and held-to-maturity securities at March 31, 2006 mature as follows:
1 year or less

Bonds .........................................................................................................................
Other ..........................................................................................................................
Total............................................................................................................................

¥36
—
¥36

1 year or less

Bonds .........................................................................................................................
Other ..........................................................................................................................
Total............................................................................................................................
34

$306
—
$306

Millions of yen
1 to 5 years 5 to 10 years¥1,1714¥1,175¥——¥—

Thousands of U.S. dollars
1 to 5 years 5 to 10 years$ 9,968
34$10,002$——$—

Over 10 years

¥—
—
¥—

Over 10 years

$—
—
$—

D. Total sales of available-for-sale securities sold in the year ended
March 31, 2006 amounted to ¥8,380 million ($71,331 thousand) and the related gains and losses amounted to ¥1,499
million ($12,760 thousand) and ¥12 million ($102 thousand),
respectively.
E. Investments in SPCs holding properties for sale are equity
investments such as preferred subscription certificates andsilent partnership (“Tokumei Kumiai”) investments in Special
Purpose Companies (SPCs) and Tokumei Kumiai which own
and develop real estate. The Company or its subsidiaries willsell real estate in SPCs and Tokumei Kumiai after thecompletion of construction. Tokumei Kumiai are a vehicle forinvestment allowed under the Japanese Commercial Code.
As of March 31, 2006, investments in SPCs holding properties for sale consisted of preferred subscription certificatesissued by SPCs.
F. The Company lent the equity securities temporarily to a financial institute under a securities lending agreement. Lent securities, included in investment securities, were ¥124,824 million($1,062,513 thousand) as of March 31, 2006.

For 2005
A. The following tables summarize the acquisition costs, book values and fair market values of securities with available fair market
values as of March 31, 2005:(a) Held-to-maturity securities:
Book value

Millions of yen
Fair market value

Difference

¥ 938

¥ 942

¥4

305
¥1,243304¥1,246(1)¥3

Securities whose fair market value exceeds book value:
National and local government bonds ........................................................................................
Securities whose fair market value does not exceed book value:
National and local government bonds ........................................................................................
Total ...............................................................................................................................................

(b) Available-for-sale securities:
Millions of yen
Acquisition cost Book value

Securities whose book value exceeds acquisition cost:
Equity securities ...............................................................................................................................
Others...............................................................................................................................................
Subtotal.............................................................................................................................................
Securities whose book value does not exceed acquisition cost:
Equity securities ...............................................................................................................................
Others...............................................................................................................................................
Subtotal.............................................................................................................................................
Total .....................................................................................................................................................

Difference¥58,395
103
58,498¥90,946
104
91,050¥32,551
1
32,552

4,974
521
5,495
¥63,993

4,397
481
4,878
¥95,928

(577)
(40)
(617)
¥31,935

B. The following table summarizes the book values of securities with no available fair market values as of March 31, 2005:
Available-for-sale securities:
Book value
Millions of yen

Unlisted equity securities ..............................................................................................................................................................
Senior securities ............................................................................................................................................................................
Investment in partnerships similar to investment limited partnerships ........................................................................................
Total...............................................................................................................................................................................................

¥

7,260
72,62240,204¥120,086

Senior securities included investments in SPCs holding properties for sale amounting to ¥49,434 million.
C. Available-for-sale securities with maturities and held-to-maturity securities at March 31, 2005 mature as follows:
1 year or less

Bonds.........................................................................................................................
Other..........................................................................................................................
Total ...........................................................................................................................

D. Total sales of available-for-sale securities sold in the year ended
March 31, 2005 amounted to ¥731 million and the related
gains amounted to ¥116 million.
E. Investments in SPCs holding properties for sale are equity
investments such as preferred subscription certificates andsilent partnership (“Tokumei Kumiai”) investments in Special

¥411
—
¥411

Millions of yen
1 to 5 years 5 to 10 years

¥833
—
¥833

¥100
—
¥100

Over 10 years

¥—
—
¥—

Purpose Companies (SPCs) and Tokumei Kumiai which own
and develop real estate. The Company or its subsidiaries
will sell real estate in SPCs and Tokumei Kumiai after thecompletion of construction. Tokumei Kumiai are a vehicle forinvestment allowed under the Japanese Commercial Code.

35

As of March 31, 2005, investments in SPCs holding properties for sale consisted of preferred subscription certificatesissued by SPCs.

F. The Company lent the equity securities temporarily to a financial
institute under a securities lending agreement. Lent securities,
included in investment securities, were ¥77,119 million as ofMarch 31, 2005.

8. SHORT-TERM DEBT AND LONG-TERM DEBT
Short-term debt at March 31, 2006 and 2005 consisted of the following:

2006

Loans, principally from banks...............................................
Commercial paper ................................................................

¥197,770
51,500¥249,270

Millions of yen
Average interest
rate (%)
2005

0.55
0.26

Thousands of
U.S. dollars
Average interest
rate (%)¥132,745
40,500¥173,245

0.66
0.10

2006

$1,683,435
438,373$2,121,808

The interest rates represent weighted average rates in effect at March 31, 2006 and 2005, regardless of borrowing currencies,
though the range of the interest rate varies by borrowing currency.
Long-term debt at March 31, 2006 and 2005 consisted of the following:
Millions of yen
2006
2005

3.1% Euroyen notes, due 2005 .................................................................................................. ¥—2.62% domestic straight bonds, due 2005 .................................................................................
—
2.85% domestic straight bonds, due 2006 .................................................................................
3,100
Floating rate domestic straight bonds, due 2006........................................................................
7,390
1.6% domestic straight bonds, due 2006 ...................................................................................
9,500
Floating rate domestic straight bonds, due 2006........................................................................
7,844
Floating rate domestic straight bonds, due 2007........................................................................
7,510
1.5% domestic straight bonds, due 2006 ...................................................................................
7,360
Floating rate domestic straight bonds, due 2006........................................................................
7,337
1.75% domestic straight bonds, due 2005 .................................................................................
—
1.85% domestic straight bonds, due 2006 .................................................................................
7,557
1.85% domestic straight bonds, due 2006 .................................................................................
9,409
1.85% domestic straight bonds, due 2006 .................................................................................
9,377
2.0% domestic straight bonds, due 2007 ...................................................................................
9,057
1.5% domestic straight bonds, due 2005 ...................................................................................
—
1.5% domestic straight bonds, due 2005 ...................................................................................
—
1.5% domestic straight bonds, due 2005 ...................................................................................
—
1.45% domestic straight bonds, due 2005 .................................................................................
—
1.45% domestic straight bonds, due 2005 .................................................................................
—
1.45% domestic straight bonds, due 2005 .................................................................................
—
1.35% domestic straight bonds, due 2006 .................................................................................
—
1.5% domestic straight bonds, due 2007 ...................................................................................
10,0001.5% domestic straight bonds, due 2007 ...................................................................................
10,0001.39% domestic straight bonds, due 2006 .................................................................................
7,000
1.4% domestic straight bonds, due 2007 ...................................................................................
20,0001.4% domestic straight bonds, due 2007 ...................................................................................
10,000
1.68% domestic straight bonds, due 2008 .................................................................................
10,0001.49% domestic straight bonds, due 2006 .................................................................................
5,000
1.92% domestic straight bonds, due 2008 .................................................................................
5,000
1.31% domestic straight bonds, due 2009 .................................................................................
20,000
1.52% domestic straight bonds, due 2010 .................................................................................
20,0001.30% domestic straight bonds, due 2009 .................................................................................
20,000
1.29% domestic straight bonds, due 2012 .................................................................................
20,000
1.28% domestic straight bonds, due 2012 .................................................................................
30,0000.75% domestic straight bonds, due 2010 .................................................................................
30,0001.18% domestic straight bonds, due 2010 .................................................................................
30,000Loans, principally from banks and insurance companies,
interest principally at rates of 0.30% to 3.20% in 2006, and 0.45% to 3.20% in 2005:
Unsecured ...............................................................................................................................
685,321
Subtotal ....................................................................................................................................... 1,017,762
Amount due within one year.......................................................................................................
(203,688)
Total ............................................................................................................................................ ¥ 814,074(*) Euroyen notes = yen denominated bonds issued in the Euro market

36

¥

700
15,366
3,100
7,390
9,500
7,844
7,510
7,360
7,337
10,000
7,557
9,409
9,377
9,057
7,147
12,00010,00010,0009,954
12,5005,000
10,00010,0007,000
20,00010,00010,0005,000
5,000
20,00020,00020,00020,000———530,036
865,144(225,182)¥ 639,962

Thousands of
U.S. dollars
2006

$

—
—
26,38762,90480,864
66,76963,926
62,64962,453—64,32580,09079,81877,094
—
—
—
—
—
—
—
85,121
85,121
59,585170,242
85,121
85,121
42,56042,560170,242
170,242
170,242
170,242
255,363
255,363
255,363

5,833,512
8,663,279(1,733,810)$ 6,929,469

The aggregate annual maturities of long-term debt at March 31, 2006 are as follows:Year ending March 31
Millions of yen
2007............................................................................................................................................................... ¥ 203,688
2008...............................................................................................................................................................
163,844
2009...............................................................................................................................................................
111,8962010...............................................................................................................................................................
97,8362011...............................................................................................................................................................
234,036
2012 and thereafter .......................................................................................................................................
206,463
Total............................................................................................................................................................... ¥1,017,762

As is customary in Japan, security must be given if requested
by lending banks under certain circumstances, and generallybanks have the right to offset cash deposited with them against

Thousands of
U.S. dollars$1,733,810
1,394,654
952,469
832,789
1,992,135
1,757,422$8,663,279

any debt or obligations payable to the bank that becomes due inthe case of default and certain other specified events. The
Company has never received such a request.

9. EMPLOYEES’ SEVERANCE AND RETIREMENT BENEFITSAs explained in Note 2 (13), the liabilities and expenses for severance and retirement benefits are determined based on theamounts obtained by actuarial calculations.

The allowance for severance and retirement benefits includedin the liability section of the consolidated balance sheets as ofMarch 31, 2006 and 2005 consisted of the following:
Millions of yen
2006
2005

Projected benefit obligation..................................................................................................................
Fair value of plan assets .......................................................................................................................
Unrecognized actuarial differences ......................................................................................................
Prepaid pension cost ............................................................................................................................
Allowance for severance and retirement benefits................................................................................

¥ 7,684(2,978)224
4¥ 4,934¥ 7,436(2,542)
105
3¥ 5,002

Thousands of
U.S. dollars
2006$ 65,407(25,349)
1,907
34$ 41,999

Included in the consolidated statements of income for the years ended March 31, 2006 and 2005 are severance and retirement
benefit expenses comprised of the following:
Millions of yen
2006
2005

Service costs – benefits earned during the year.........................................................................................
Interest cost on projected benefit obligation ..............................................................................................
Expected return on plan assets ..................................................................................................................
Amortization of actuarial differences ..........................................................................................................
Severance and retirement benefit expenses ..............................................................................................

The discount rates and the rates of expected return on plan
assets for the years ended March 31, 2006 and 2005 used by
the Company are 2.0%, respectively (the discount rate used by
one consolidated subsidiary is 1.5%). The estimated amount of

¥ 487
130
(49)
(105)
¥ 463

¥488
128
(47)
117
¥686

Thousands of
U.S. dollars
2006$4,145
1,107
(417)
(894)
$3,941

all retirement benefits to be paid at future retirement dates isallocated equally to each service year using the estimated number of total service years. Actuarial gains and losses are recognized in the income statement in the next year.

37

10. LOSS ON IMPAIRMENT OF FIXED ASSETSThe Company and its consolidated domestic subsidiaries recognized impairment losses on the following assets for the year
ended March 31, 2006.

Use

Location

Number ofproperties

Land for leased buildings
Leased land
Land for development
Idle assets

Chuo-ku, Tokyo, etc.
Inba-gun, Chiba
Izumisano-shi, Osaka, etc.
Susono-shi, Shizuoka, etc.

4
1
5
2

The Company and its consolidated domestic subsidiaries recognized losses on the impairment of certain property, which are
generally assessed individually for impairment. Company houses
are treated as common assets.
As a result of declines in property values and flagging rental
rates, the carrying values of the land holdings summarized above
have been reduced by ¥25,244 million ($214,879 thousand) totheir recoverable amounts. These write-downs were recognized
as impairment losses in other expenses.

Details of loss on impairment of fixed assets were as follows:
Millions of yen
2006

Thousands of
U.S. dollars
2006¥25,244$214,879

Land...............................................................................................................................................................

The recoverable values of these assets were calculated using the net disposal value method. The net disposal value method forland for leased buildings is based on capitalization value, and that for the others is based mainly on the assessment value for property
tax purposes.

11. LOSS ON SALE AND DEVALUATION OF PROPERTY AND EQUIPMENT
As explained in Note 2 (8), effective April 1, 2005, the Company
and its subsidiaries applied the new accounting standard for
impairment of fixed assets. In order to prepare for the applicationof the standard, the Company and its subsidiaries sold and recognized losses on certain fixed assets of ¥15,672 million and¥49,414 million for the years ended March 31, 2005 and 2004,
respectively. Some of the fixed assets were sold to the Company’s
consolidated subsidiaries, and such losses incurred in thesetransactions were not eliminated in consolidation but wererecorded as net loss on devaluation of land or buildings. Losson sale and devaluation of property and equipment of ¥15,672
million for the year ended March 31, 2005 consists of net loss
on sale of land of ¥11,400 million, loss on devaluation of landof ¥1,672 million and net loss on sale of buildings of ¥2,600 million, and that of ¥49,414 million for the year ended March 31,
2004 consists of net loss on sale of land of ¥22,508 million,
loss on devaluation of land of ¥20,413 million, net loss of saleof buildings of ¥6,339 million and loss on devaluation of buildings of ¥154 million.

12. LOSS ON DEVALUATION OF PROPERTY AND EQUIPMENT
The Company recognized loss on devaluation of property and equipment of ¥17,185 million ($146,280 thousand) and ¥11,886 million
for the years ended March 31, 2006 and 2005, respectively. The property and equipment were sold to its consolidated subsidiaries,and such losses incurred in these transactions were not eliminated in consolidation but were recorded as loss on devaluation of property and equipment.
Details of property and equipment were as follows:
Millions of yen
2006
2005

Land, etc. ............................................................................................................................................
Buildings and structures, etc. .............................................................................................................

38¥16,385
800¥11,886—

Thousands of
U.S. dollars
2006$139,470
6,810

13. GAIN ON SALE OF PROPERTY AND EQUIPMENT AND LOSS ON LIQUIDATION OF SILENT PARTNERSHIP
Gain on sale of property and equipment for the year ended March
31, 2006 is mainly from the sale of a 60% ownership as a beneficiary right in the Shinjuku Sumitomo Building at June 30, 2005.
Certain information as to the sale is as follows.
(1) Property sold:Name of property: Shinjuku Sumitomo Building (60% ownership)
Sales price: ¥90,000 million ($766,088 thousand)Cost of sales: ¥74,768 million ($636,432 thousand)(2) Purchaser:
Corporate name: Prime Quest Three Co., Ltd.
Address of head office: Chiyoda-ku, Tokyo, JapanThe silent partnership that had been involved in the ownership of this property was liquidated as a result of the sale, andloss on liquidation of silent partnership of ¥1,303 million($11,091 thousand) was incurred.

14. DIRECTORS’ RETIREMENT BENEFITS
A performance-based executive remuneration policy was adopted by a resolution at the 71st shareholders’ meeting, and theCompany settled the retirement benefits owed directors under
the prior arrangement for directors’ retirement benefits. The
retirement benefits will be paid when the directors retire as both

director and executive officer. The Company recognized ¥2,015
million in retirement obligations at March 31, 2005 in other longterm liabilities, exclusive of the amount provided for the directors who retired as at the 71st shareholders’ meeting.

15. INCOME TAXESThe normal effective statutory income tax rate in Japan arisingout of aggregation of corporate, enterprise and inhabitant taxes
was approximately 40.69% for the years ended March 31, 2006
and 2005.

The following table summarizes the significant differences
between the statutory tax rate and the Company’s effective tax
rate for financial statement purposes for the year ended March
31, 2006.

The differences between the statutory tax rate and the Company’s effective tax rate for the year ended March 31, 2005 were
insignificant and are not presented.
2006

Statutory tax rate ...................................................................................................................................................................................... 40.69%
Valuation allowance for deferred tax assets .......................................................................................................................................... 1.94
Per capita inhabitant taxes..................................................................................................................................................................... 0.42
Entertainment expenses and others not deductible for tax purposes................................................................................................... (0.13)
Other...................................................................................................................................................................................................... (0.14)
Effective tax rate....................................................................................................................................................................................... 42.78%

Details of deferred tax assets and liabilities at March 31, 2006 and 2005 were as follows:
Millions of yen
2006
2005

Thousands of
U.S. dollars
2006

Deferred tax assets:
Loss on impairment of fixed assets .............................................................................................
Net operating loss carryforwards .................................................................................................
Accrued enterprise tax and business office tax ...........................................................................
Allowance for employees’ severance and retirement benefits ...................................................
Loss on devaluation of inventories ..............................................................................................
Unrealized inter-company profits ................................................................................................
Accrued bonuses .........................................................................................................................
Allowance for doubtful accounts .................................................................................................
Accrued directors’ retirement benefits ........................................................................................
Other............................................................................................................................................
Subtotal of deferred tax assets ....................................................................................................
Valuation allowance .....................................................................................................................
Total deferred tax assets .............................................................................................................

¥ 10,273
7,724
2,891
1,996
1,627
1,480
1,319
1,050
785
7,481
36,626(9,727)
26,899

¥

—
8,050
833
1,985
1,939
1,545
1,332
600
820
5,625
22,729(8,531)
14,198$ 87,445
65,747
24,60816,99013,84912,598
11,227
8,938
6,682
63,680311,764(82,797)
228,967

Deferred tax liabilities:
Net unrealized holding gains on securities...................................................................................
Retained earnings appropriated for tax allowable reserves .........................................................
Total deferred tax liabilities ..........................................................................................................
Net deferred tax assets (liabilities) ..................................................................................................

(32,070)(4,959)(37,029)¥(10,130)(13,079)—(13,079)¥ 1,119(272,983)(42,211)(315,194)$ (86,227)39

16. GUARANTEE AND OTHER DEPOSITS RECEIVED
Guarantee and other deposits received at March 31, 2006 and 2005 were as follows:

2006

Short-term deposits and long-term deposits
due within one year:
Non-interest-bearing ..........................................................
Interest-bearing .................................................................

Guarantee and lease deposits from tenants:
Non-interest-bearing ..........................................................
Interest-bearing .................................................................
Long-term deposits:
Non-interest-bearing ..........................................................
Interest-bearing .................................................................
Total ......................................................................................

Millions of yen
Average interest
rate (%)
2005

Thousands of
U.S. dollars
Average interest
rate (%)

2006¥127,908
82,737
210,645—
0.34¥159,830
34,042
193,872—0.18$1,088,764
704,265
1,793,029

151,691———

160,273———

1,291,207—

224,8216,000
382,512¥593,157—
0.81

241,545
26,000427,818¥621,690—
0.80

1,913,695
51,0733,255,975$5,049,004

The aggregate annual maturities of interest-bearing guarantee and other deposits received at March 31, 2006 are as follows:Year ending March 31

2007 ..............................................................................................................................................................
2008 ..............................................................................................................................................................
2009 ..............................................................................................................................................................
2010 ..............................................................................................................................................................
2011 ..............................................................................................................................................................
2012 and thereafter ......................................................................................................................................

Millions of yen

Thousands of
U.S. dollars¥82,737
6,000
—
—
—
—
¥88,737$704,265
51,073————$755,338

17. SHAREHOLDERS’ EQUITY
Under the Commercial Code of Japan, the entire amount of theissue price of shares is required to be accounted for as capital,
although a company may, by resolution of its Board of Directors,
account for an amount not exceeding one-half of the issue priceof the new shares as additional paid-in capital, which is included
in capital surplus.
The Commercial Code provides that an amount equal to atleast 10% of cash dividends and other cash appropriations shallbe appropriated and set aside as a legal earnings reserve until
the total amount of the legal earnings reserve and additional
paid-in capital equals 25% of common stock. The total amountof the legal earnings reserve and additional paid-in capital of theCompany has reached 25% of common stock, and therefore theCompany is not required to provide additional legal earnings

40

reserve. The legal earnings reserve and additional paid-in capital
may be used to eliminate or reduce a deficit by resolution of theshareholders’ meeting or may be capitalized by resolution of theBoard of Directors. On condition that the total amount of thelegal earnings reserve and additional paid-in capital remains
equal to or exceeding 25% of common stock, they are available
for distribution by the resolution of the shareholders’ meeting.
The legal earnings reserve is included in retained earnings in theaccompanying financial statements.
The maximum amount that the Company can distribute as
dividends is calculated based on the non-consolidated financial
statements of the Company in accordance with the Commercial
Code.

18. INFORMATION FOR CERTAIN LEASE TRANSACTIONS
Finance leases that do not transfer ownership to lessees are not capitalized and accounted for in the same manner as operating leases. Certain information for such non-capitalized finance leases is as follows.
As Lessee
A summary of the pro-forma amounts (inclusive of interest) of acquisition cost, accumulated depreciation and net book value atMarch 31, 2006 and 2005 was as follows:
Millions of yen
2006
2005

Acquisition cost:
Buildings and structures .................................................................................................................
Other...............................................................................................................................................
Accumulated depreciation .................................................................................................................
Net book value ...................................................................................................................................

Pro-forma depreciation equivalents of ¥1,565 million ($13,321
thousand) and ¥2,444 million for the years ended March 31,
2006 and 2005, respectively, were computed using the straightline method over the lease terms assuming no residual value orresidual indemnity.

¥ 9,079
2,218(5,130)¥ 6,167¥15,177
2,463(6,541)¥11,099

Thousands of
U.S. dollars
2006$ 77,281
18,880(43,667)$ 52,494

Lease expenses under finance leases, inclusive of interest,
for the years ended March 31, 2006 and 2005 amounted to¥1,565 million ($13,321 thousand) and ¥2,444 million, respectively.
Future lease payments and receipts under such finance leases and non-cancelable operating leases at March 31, 2006 and2005 were as follows:
Millions of yen
2006
2005

Finance leases
Future lease payments:
Due within one year ...............................................................................................................
Due after one year..................................................................................................................
Total.....................................................................................................................................
Future sub-lease payments:
Due within one year ...............................................................................................................
Due after one year..................................................................................................................
Total.....................................................................................................................................
Future sub-lease receipts:
Due within one year ...............................................................................................................
Due after one year..................................................................................................................
Total.....................................................................................................................................
Operating leases
Future lease payments:
Due within one year ...............................................................................................................
Due after one year..................................................................................................................
Total.....................................................................................................................................
Future lease receipts:
Due within one year ...............................................................................................................
Due after one year..................................................................................................................
Total.....................................................................................................................................

¥ 1,398
4,769¥ 6,167

2,279
8,820
¥ 11,099$ 11,900
40,594$ 52,494

¥

¥

$

¥

¥
¥

15
40
55

15
40
55

¥

Thousands of
U.S. dollars
2006

¥

¥
¥

4
14
18

4
14
18

$

$
$

128
340
468

128
340
468

¥12,675
66,343¥79,018¥ 15,740
107,028¥122,768$107,891
564,717$672,608

¥

¥

$

¥

23
5
28

¥

103
498
601

$

196
42
238

41

19. DERIVATIVE TRANSACTIONSThe Company and its subsidiaries utilize derivative financial
instruments only for the purpose of hedging the currency risk
associated with foreign currency denominated transactions or
hedging the interest rate risk associated with the Companies’
loans payable.
Foreign exchange forward contracts and cross currency swap
contracts are subject to risks of foreign exchange rate changes.
Interest rate swap contracts are subject to risks of interest ratechanges. The derivative financial instruments are executed withcreditworthy financial institutions, and the Company’s management believes there is little risk of default by counterparties.
The derivative transactions are executed by the Company’s
Finance Department in accordance with the decisions of acommittee whose chairman is the director of the Finance
Department. The Finance Department prepares reports on derivative transactions that are provided to the director of the Finance
Department periodically.
The following summarizes hedging derivative financial instruments used by the Companies and items hedged:
Hedging instruments:

Hedged items:

Foreign exchange forward
contracts and cross currency
swap contracts

Foreign currency monetaryliabilities and foreigntransactions

Interest rate swap contracts

Bank loans, bonds
and deposits

The Companies evaluate hedge effectiveness by comparing
the cumulative changes in cash flows from or the changes infair value of hedged items and the corresponding changes in
the hedging derivative instruments.
The evaluation of hedge effectiveness of interest rate swap
contracts for the years ended March 31, 2006 and 2005 was not
required as special hedge accounting has been applied to derivative transactions of interest rate swap contracts. Also, the evaluation of hedge effectiveness of foreign exchange forward contracts
for the years ended March 31, 2006 and 2005 was not required
because the significant terms of the hedging instruments andthose of the hedged items were the same, and the risk ofchanges in foreign exchange rates was effectively hedged.
The contract amounts and unrealized gains or losses of outstanding derivative transactions at March 31, 2006 and 2005
were not disclosed because all derivative transactions wereused as hedges and hedge accounting was applied.

20. SEGMENT INFORMATIONThe Company and its consolidated subsidiaries mainly operate their business in five segments: leasing of buildings, apartments,and other properties; sale of condominiums; construction of housing and buildings; brokerage business; and other business.
Information by industry segment for the years ended March 31, 2006, 2005 and 2004 is summarized as follows:
Millions of yen

For 2006
I Net sales and operating income:Net sales
Customers..............................
Intersegment..........................
Total ....................................
Costs and expenses ..................
Operating income...................
II Identifiable assets,
depreciation expense, loss on
impairment of fixed assets andcapital expenditures:
Identifiable assets......................
Depreciation expense................
Loss on impairmentof fixed assets .........................
Capital expenditures ..................

42

Elimination
and/orcorporate

Leasingbusiness

Salesbusiness

Construction
business

Brokeragebusiness

Otherbusiness

Total¥ 232,248
2,032
234,280
170,980¥ 63,300¥224,735—
224,735
191,618¥ 33,117¥133,609
1,549
135,158
126,412¥ 8,746¥48,939278
49,21732,249¥16,968¥ 6,994
3,157
10,151
9,668¥ 483¥ 646,525
7,016
653,541
530,927¥ 122,614¥—(7,016)(7,016)3,575¥ (10,591)¥ 646,525—
646,525534,502¥ 112,023¥1,619,959
15,209¥415,441100¥ 19,617
127¥ 8,457309¥51,464
77¥2,114,939
15,822¥345,141508¥2,460,080
16,33024,335
237,078

888
2,529

21
300

—
317

—
30

25,244240,254—260

25,244
240,514

Consolidated

Millions of yen
Elimination
and/orcorporate

For 2005
I Net sales and operating income:Net sales
Customers .............................
Intersegment .........................
Total....................................
Costs and expenses .................
Operating income ..................

Leasingbusiness

Salesbusiness

Construction Brokeragebusinessbusiness

Otherbusiness

Total¥ 219,386
1,848
221,234
165,366¥ 55,868¥224,191—
224,191
191,836¥ 32,355¥122,297
5,091
127,388
118,958¥ 8,430¥42,953492
43,44529,956¥13,489¥ 7,288
4,296
11,584
10,141¥ 1,443¥ 616,115
11,727
627,842516,257¥ 111,585¥—(11,727)(11,727)(433)¥ (11,294)¥ 616,115—
616,115515,824¥ 100,291

II Identifiable assets,
depreciation expense andcapital expenditures:
Identifiable assets .....................
Depreciation expense ..............
Capital expenditures .................

¥1,538,469
13,058111,577¥293,260
111
262¥ 17,755
120
296¥ 7,935275
329¥48,473
81
111¥1,905,892
13,645112,575¥230,437
374
898¥2,136,329
14,019113,473

Elimination
and/orcorporate

Consolidated

Consolidated

Millions of yen

For 2004
I Net sales and operating income:Net sales
Customers .............................
Intersegment .........................
Total....................................
Costs and expenses .................
Operating income ..................

Leasingbusiness

Salesbusiness

Construction Brokeragebusinessbusiness

Otherbusiness

Total¥ 201,307
1,469
202,776
150,119¥ 52,657¥213,285
18
213,303
181,023¥ 32,280¥112,819
12,267125,086
116,875¥ 8,211¥39,529280
39,80931,271¥ 8,538¥ 6,922
4,006
10,928
10,526¥ 402¥ 573,862
18,040591,902489,814¥ 102,088¥—(18,040)(18,040)(11,929)¥ (6,111)¥ 573,862—
573,862
477,885¥ 95,977

II Identifiable assets,
depreciation expense andcapital expenditures:
Identifiable assets .....................
Depreciation expense ..............
Capital expenditures .................

¥1,481,757
11,211
33,470¥261,679
93
473¥ 26,024165
165¥17,694291
356¥91,21691
90¥1,878,370
11,851
34,554¥212,600360
312¥2,090,970
12,211
34,866

Total

Elimination
and/orcorporate

Consolidated

Thousands of U.S. dollars
Leasingbusiness

Salesbusiness

For 2006
I Net sales and operating income:Net sales
Customers ............................. $ 1,976,915 $1,912,964
Intersegment .........................
17,297—
Total....................................
1,994,212 1,912,964
Costs and expenses .................
1,455,397 1,631,069
Operating income ..................... $ 538,815 $ 281,895
II Identifiable assets,
depreciation expense, loss on
impairment of fixed assets andcapital expenditures:
Identifiable assets ..................... $13,789,232 $3,532,278
Depreciation expense ...............
129,461
851
Loss on impairmentof fixed assets ........................
207,141
7,559
Capital expenditures .................
2,018,029
21,527

Construction
business

Brokeragebusiness$1,137,291
13,186
1,150,477
1,076,030$ 74,447$416,573 $ 59,534 $ 5,503,277 $
2,366
26,872
59,721
418,939
86,406
5,562,998
274,506
82,295
4,519,297$144,433 $ 4,111 $ 1,043,701 $$ 166,982
1,081$ 71,987 $438,066 $18,002,545 $2,937,870 $20,940,415
2,630
655
134,678
4,324
139,002

Distributions from SPCs and partnerships that operate realestate leasing business are included in net sales of the “Leasing
business”.
The Company classified expenses and assets of the generaladministrative division in certain consolidated subsidiaries to

179
2,554

—
2,698

Other
business—
255

214,879
2,045,063— $ 5,503,277(59,721)—(59,721)5,503,277
30,431
4,549,728(90,152) $ 953,549

—
2,213

214,879
2,047,276

unallocatable operating expenses and corporate assets in the segment information for the years ended March 31, 2006 and 2005.
Under a new management policy, the Company compares
the contribution levels of the business operations between
each segment more promptly, clearly, and easily.

43

As a result, for the year ended March 31, 2004, unallocatedexpenses increased by ¥2,487 million, corporate assets increasedby ¥10,818 million, depreciation expense increased by ¥22 million and corporate capital expenditures increased by ¥55 million

for the “Elimination and/or corporate” section compared withwhat would have been recorded under the classification policy at
March 31, 2006 and 2005.

21. CONTINGENT LIABILITIESAt March 31, 2006, the Company and its consolidated subsidiaries were contingently liable as guarantors of borrowings bycustomers and others in an amount aggregating to ¥1,145 million ($9,746 thousand).
Also, at March 31, 2006, the Company and its consolidated
subsidiaries had outstanding commitments to guarantee loans ofcustomers and others amounting to ¥9 million ($77 thousand).
(Lawsuits)
The Company was a defendant in the following lawsuits, inwhich, based on the Leased Land and House Lease Law, theCompany claimed reductions of the rental payments that it
owed.
One lawsuit is pending in court.

A lawsuit was brought in the Tokyo District Court against theCompany in 1995, relating to claims to recover the difference
between the rental payments based on the lease agreements
and the amounts the Company paid taking a position under the
Leased Land and House Lease Law. While the Tokyo District
Court issued judgments against the Company in October 1998,
the Company appealed to the Tokyo Higher Court in November
1998 as the Company believed that the judgments were contradictory to previous legal interpretations.
The Tokyo Higher Court issued a judgment for the Company
in October 1999. The lessor appealed to the Supreme Court inNovember 1999.
In October 2003, the Supreme Court reversed the judgments
and remanded its case to the Tokyo Higher Court.

22. SUBSEQUENT EVENTSThe Company issued ¥20,000 million ($170,242 thousand) in
1.85% domestic straight bonds due 2011 on April 28, 2006.
The Company issued ¥20,000 million ($170,242 thousand) in
1.86% domestic straight bonds due 2011 on June 8, 2006.

44

On June 29, 2006, the shareholders of the Company
approved payments of a year-end cash dividend of ¥5 ($0.04) per
share or a total of ¥2,375 million ($20,216 thousand) to shareholders of record at March 31, 2006.

INDEPENDENT AUDITORS’ REPORTTo the Shareholders and Board of Directors of
Sumitomo Realty & Development Co., Ltd.:We have audited the accompanying consolidated balance sheets of Sumitomo Realty & Development Co., Ltd. and consolidated subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity and cash flows foreach of the three years in the period ended March 31, 2006, expressed in Japanese yen. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to independently express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sumitomo Realty & Development Co., Ltd. and subsidiaries as of March 31, 2006 and 2005, and the consolidated
results of their operations and their cash flows for each of the three years in the period ended March 31, 2006, in conformity withaccounting principles generally accepted in Japan.
Without qualifying our opinion, we draw attention to the following.
As discussed in Note 2. (8) to the consolidated financial statements, effective April 1, 2005, Sumitomo Realty & Development Co., Ltd.
and consolidated domestic subsidiaries adopted the new accounting standards for impairment of fixed assets.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2006 arepresented solely for convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts and, in our opinion,such translation has been made on the basis described in Note 1 to the consolidated financial statements.

Tokyo, Japan
June 29, 2006

KPMG AZSA & Co., an audit corporation incorporated
under the Japanese Certified Public Accountants Law,is the Japan member firm of KPMG International,a Swiss cooperative.

45

BOARD OF DIRECTORS AND AUDITORS(As of June 29, 2006)

Chairman of the Board
Shinichiro Takagi*
President & Chief Executive Officer
Junji Takashima*
Director & Advisor
Taro Ando*
Directors & Senior Managing Executive Officers
Tetsuro Tsuruta*
Masayoshi Ohashi*
Kenichi Onodera*
Kenichiro Sugimoto
Kazuo Masuoka
Senior Managing Executive Officer
Yoshifumi Nakamura
Senior Executive Officers
Shozo Suzuki
Takahiro Daisaka
Kenichi Kameyama
Tsutomu Oyama
Hiroyuki Asano
Yoshiteru Nishimoto
Naoyoshi Matsugami
Takashi Saito
Masayuki Takahashi

Executive Officers
Akira Murakami
Masaki Ogawa
Yoshinobu Sakamoto
Nobuaki Takemura
Koji Ito
Satoru Ozawa
Toshikazu Tanaka
Masato Kobayashi
Kojun Nishima
Yoshiyuki Odai
Hisatoshi Katayama
Masumi Aoki
Statutory Auditors
Shinsaku Sanmoto
Naoto Enda
Standing Statutory Auditors
Ryoichi Nomura
Chuji Kitamura
Kunio Kobayashi* Representative Director

CORPORATE DATA
(As of March 31, 2006)

Head Office
Shinjuku NS Building
4-1, Nishi-Shinjuku 2-chome
Shinjuku-ku, Tokyo 163-0820, Japan
Phone: +81-3-3346-2342
Facsimile: +81-3-3346-1652
Corporate Website
http://www.sumitomo-rd.co.jp/
Date of Establishment
December 1, 1949

46

Number of Employees
7,607 (Consolidated)
Major Consolidated Subsidiaries
Sumitomo Real Estate Sales Co., Ltd.
Sumitomo Fudosan Syscon Co., Ltd.
Sumitomo Fudosan Tatemono Service Co., Ltd.
Sumitomo Fudosan Esforta Co., Ltd.
Sumitomo Fudosan Finance Co., Ltd.
Izumi Restaurant Co., Ltd.
Universal Home Inc.

INVESTOR INFORMATION(As of March 31, 2006)

Major Shareholders

Paid-in Capital¥122,805 million
Number of Common Stock
Authorized: 1,900,000,000 shares
Issued: 476,085,978 shares

Percentageof shares held

30,724

6.45%

22,796

4.79

13,7482.89

11,990

2.52

8,136
7,912

1.71
1.66

6,831

1.43

6,740
6,500

1.42
1.37

6,439

1.35

Japan Trustee Services
Bank, Ltd. (Trust account)
The Master Trust Bankof Japan, Ltd. (Trust account)
Japan Trustee Services
Bank, Ltd. (Trust account 4)
Sumitomo Mitsui
Banking Corporation
The Sumitomo Trust &Banking Co., Ltd.
Kajima Corporation
State Street Bankand Trust Company
Mitsui Sumitomo
Insurance Co., Ltd.
Shimizu Corporation
State Street Bank andTrust Company 505103

Number of Shareholders
20,292
Stock Exchange Listings
Tokyo Stock Exchange
Osaka Securities Exchange
Breakdown of Shareholders
Trust Accounts
Financial Institutions
Other Companies
Foreign Companies
Individuals and Others

Number ofshares held(Thousands)

22.92%
10.04%
21.17%
37.53%
8.34%

Stock Price and Trading Volume on Tokyo Stock Exchange
(¥)
4,000

2,400

Stock Price (Right Scale)
TOPIX Average (Left Scale)

1,800

3,000

1,200

2,000

600

1,000

0

0

(Millions of shares)
200

Trading Volume
150

100

50

0

7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6
2001

2002

2003

2004

2005

2006

47

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

ANNUAL REPORT 2006

Shinjuku NS Building, 4-1, Nishi-Shinjuku 2-chome
Shinjuku-ku, Tokyo 163-0820, Japan
Phone: +81-3-3346-2342 Facsimile: +81-3-3346-1652

http://www.sumitomo-rd.co.jp/

Printed in Japan
Printed on recycled paper