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SUMITOMO REALTY & DEVELOPMENT CO., LTD. 2004 ANNUAL REPORT2004 Annual Report

Tow a r d t h e N e x t S t a g e

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PROFILE

Sumitomo Realty & Development Co., Ltd., a core member of theSumitomo Group, is one of Japan’s premier real estate companies. The
Company is well established as a comprehensive developer and supplierof high-quality office buildings and condominiums in urban areas.
The Company is also engaged in a broad array of businesses,
including real estate brokerage, housing construction, remodelingand building management services. While continuing to create
comfortable working and living environments that contribute to a higher
quality of life, the Company is poised to begin a new phase of growth in the 21st century.

CONTENTS
1

Five-Year Financial Highlights

2

To Our Shareholders

6

At a Glance8

Our History

9

Outline of Operations

17

Financial Section

40

Board of Directors and Auditors

40

Corporate Data

41

Share Price and Trading Volume on Tokyo Stock Exchange

CAUTIONARY STATEMENTS WITH RESPECT TO FORWARD-LOOKING STATEMENTS

Statements made in this annual report with respect to plans, targets and future performance that are not historicalfact are forward-looking statements. These statements are based on management’s assumptions and beliefs in lightof the information currently available to it. Sumitomo Realty & Development Co., Ltd. cautions that a number of factors could cause actual results to differ materially from 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 andinterest rate trends.

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Sumitomo Realty & Development Co., Ltd.

FIVE-YEAR FINANCIAL HIGHLIGHTS
Years ended March 31

Thousands of
U.S. dollars

Millions of yen
2004

2003

2002

2001

2000

2004

Consolidated:
Revenue from operations¥ 573,862¥ 533,915¥ 497,877¥ 459,245¥ 421,587$ 5,429,672

Revenue from leasing business

201,307

191,215

176,244

163,047

151,268

1,904,693

Revenue from sales business

213,285

183,729

170,428

149,196

150,483

2,018,025

Revenue from construction business

112,819

114,206

108,336

104,549

80,064

1,067,452

Revenue from brokerage business

39,52937,33535,966

34,702

31,633374,009

Revenue from other business

6,922

7,430

6,903

7,751

8,139

65,493Operating income

95,97788,51280,37075,21870,548908,099

Ordinary profit

65,97656,76047,14238,50927,069624,241

Net income (loss)

6,320

4,974

22,996(18,008)

14,737

59,798

Total assets

2,090,970

2,015,667

1,972,735

1,903,529

1,916,343

19,783,991

Total shareholders’ equity

303,875

211,821

213,767

193,442

211,140

2,875,154

Yen

U.S. dollars

Per share:
Net income (loss)

¥

15.34

Shareholders’ equity
Dividend

¥

12.22

¥

56.50

¥

(44.27)

¥

36.23

$

0.15

639.10520.84525.17475.51519.01

6.05

9.00

6.00

6.00

6.00

6.00

0.09

Note: The 2004 yen amounts have been translated into U.S. dollars, for convenience only, at the rate of ¥105.69=U.S.$1, the approximate exchange rate on March 31, 2004.

Revenue from Operations

Operating Income(Billions of yen)(Billions of yen)

Ordinary Profit(Billions of yen)
96

574
534

89

498
450

80

459

71

422

66

80

60

75

57
47

45

60

39

300
40

30

20

15

27

150

0

2000

2001

2002

2003

2004

0

2001

2002

2003

2004

0

2000

2001

2002

2003

Net Income (Loss)

Total Assets

Total Shareholders‘ Equity(Billions of yen)(Billions of yen)(Billions of yen)

2,000
40

1,916

1,904

1,973

2,016

2004

2,091
304

300

1,500

23
20

2000

211

214

212

2002

2003

193

200

15
1,000
5

6

0

100
500
(18)

-20

2000

2001

2002

2003

2004

0

2000

2001

2002

2003

2004

0

2000

2001

2004

Sumitomo Realty & Development Co., Ltd. 1

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TO OUR SHAREHOLDERS

Junji Takashima, President

Fiscal 2004 (ended March 31, 2004) was another memorable year for

er levels each year, and to markedly enhance earning capacity.

Sumitomo Realty. Revenue from operations, operating income andAlthough Japan’s deflationary economy persisted longer thanordinary profit rose for the seventh consecutive year while ordinary

was assumed when the plan was formulated, Sumitomo Realty suc-profit was a record high for the fourth year in succession.

cessfully achieved its goal of setting record high levels in revenue andConsolidated revenue from operations was ¥573.9 billion, operating

profit in each of the three years of the plan. These excellent results

income was ¥96.0 billion, and ordinary profit was ¥66.0 billion. The

are a measure of the Company’s ability to adapt swiftly to changes in

Company incurred an extraordinary loss of ¥50.4 billion, which includ-

the business environment. More specifically, the Company expanded

ed a loss on sale of fixed assets of ¥49.4 billion. This loss on sales

growth in each of its four business areas: leasing, principally office

was our advance response to the adoption of impairment accounting

buildings heavily weighted in central Tokyo; sales, focusing on the

carried on from the previous fiscal year. As a result, net income fordevelopment and sale of high-rise condominiums; brokerage of resi-

the fiscal year under review was ¥6.3 billion.

dential houses and income producing properties; and construction,

Looking to fiscal 2005, we anticipate this trend of increasing revenue and profit will continue. The Company forecasts consolidated

which has recently developed into one of our major business areas,emphasizing custom house construction and house remodeling.

revenue from operations of ¥630 billion, operating income of ¥99 billion, and ordinary profit of ¥71 billion. After accounting for an extra-

Adoption of Impairment Accounting

ordinary loss of ¥15 billion, which includes a loss on sale of fixed

A key issue confronting Sumitomo Realty was the adoption of impair-assets, we expect to report net income of ¥31 billion.

ment accounting, which will become compulsory from fiscal 2006. Our
response has been to take preemptive measures and to bring the

MEDIUM-TERM MANAGEMENT PLAN AND PRESSING ISSUES

Company’s accounts in line before the standard takes effect. In specific terms, we have sold off land holdings without a specific plan for

Overview of the New Three-Year Growth Plan

development and leased assets that do not generate an investment yieldIn the three-year period ended March 2004, Sumitomo Realty wasof at least 2.5% on a book value basis. The Company recorded an extra-

guided by the New Three-Year Growth Plan (New Growth Plan). This

ordinary loss of ¥48.7 billion in fiscal 2003 and ¥49.4 billion in fiscal 2004

plan succeeded the Five-Year Business Reconstruction Plan (Businessfor a two-year total of ¥98.1 billion. These measures have allowed

Reconstruction Plan), which aimed at achieving historical high profits

Sumitomo Realty to mostly complete the early adoption of impairment

within five years, surpassing the previous record reported in 1991 andaccounting and to significantly enhance the quality of its assets.

successfully achieved its goal a year ahead of schedule in fiscal 2001.
The principal focus of the New Growth Plan was to consistently raise

Improving Our Financial Position

revenue from operations, operating income and ordinary profit to high-

Building a more stable financial base was another important issue for

2 Sumitomo Realty & Development Co., Ltd.

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Sumitomo Realty. The Group’s total interest-bearing liabilities (the total

to increase the profit contribution from the construction and bro-of loans, corporate bonds, notes and guarantee obligations) reachedkerage businesses as a percentage of the total, and (5) to culti-a peak of close to ¥1,700 billion as of March 31, 1998. In the period

vate new businesses. Numerical targets for each objective are ascovering the Business Reconstruction Plan, we successfully reduced

follows.

this figure by approximately ¥400 billion. During the implementation of
the New Growth Plan, this figure was reduced by a further ¥240 bil-(1) Growth Targets
Billions of Yenlion bringing the balance of total interest-bearing liabilities to ¥1,048.9
billion as of March 31, 2004. Furthermore, in March 2004, we raised

Revenue from Operations

FY2007700+126*capital totaling ¥71.9 billion through an additional public offering tak-Operating Income

Ordinary Profit

115
+19*
85
+19*
* Increase in comparison with FY2004.

ing steps to enhance our capital base.
(2) Net Interest-Bearing Liabilities Reduction Target
Top Gear Growth Three-Year Plan

To reduce the ratio of net interest-bearing liabilities to operating prof-

Since fiscal 1998, Sumitomo Realty has implemented a series ofit (ND/OP) to less than eight times.

management plans with the aim of enhancing earning capacity.

Note: Net interest-bearing liabilities to operating profit ratio = Net interest-bearing liabilities ÷ (operating profit + interest & dividend income)

The Business Reconstruction Plan through fiscal 2001 was formulated to counter the business difficulties that arose as a result of
the collapse of the bubble economy. The New Growth Plan, which(3) Shareholders’ Equity Target

ended in the fiscal year under review, was designed to raise rev-

To improve the ratio of net interest-bearing liabilities to shareholders’enue from operations, operating and ordinary profit to higher lev-

equity (ND/E) to less than three times.

els each year. Considering the speed at which we have experi-

Note: Net interest-bearing liabilities to shareholders’ equity ratio = Net interest-bearing
liabilities ÷ shareholders’ equity

enced growth throughout this period, Sumitomo Realty launched
the Top Gear Growth Three-Year Plan (Top Gear Growth Plan) in
April 2004 to push forward from the foundation of profitability set(4) Target for Profit Contribution from the Construction and Brokeragein the last two plans and to sustain a more controlled pace in rev-

Businesses as a Percentage of the Totalenue and profit growth and to emphasize financial stability.

Focusing on operations free of capital and inventory risks, we will strive

In formulating the new plan, Sumitomo Realty identified five

to increase the share of ordinary profit from the construction and bro-

key objectives: (1) to maintain growth, (2) to reduce net interest-

kerage businesses to one third. The share for the fiscal year ended

bearing liabilities (the total of loans, corporate bonds, and notes

March 2004 was approximately one fourth of total ordinary profit.

less cash and deposits), (3) to increase shareholders’ equity, (4)Sumitomo Realty & Development Co., Ltd. 3

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Comparison of Management Indicators for Base Years of Previous Management Plans
FY1997
FY2001
FY2004
ND/OP ratio
29.6 times
15.5 times
9.4 times
ND/E ratio
5.4 times
6.1 times
3.0 times

EXTENSIVE MANAGEMENT SYSTEMS RENEWAL

FY2007
under 8.0 times
under 3.0 times

Business Promotion Structural Reform
We undertook strategic organizational reforms to create a structure

In conjunction with the launch of the Top Gear Growth Plan, we havethat is better placed to respond to the recent changes in the real

introduced initiatives such as an executive officer system in an effort

estate market and the Company’s ongoing evolution. Sumitomo Realty

to reinforce our management structure and adopted broad organiza-

has restructured its business units into six head office divisions name-tional reforms to reinvigorate business promotion.

ly, urban property development, urban property management, housingbusiness, affiliated companies, planning and financing, and general

Far-Reaching Reform of Our Management Structure
Executive Officer Systemaffairs, and the newly established new business planning section.
We changed our business promotion structure shifting from prod-

Sumitomo Realty introduced an executive officer system to bolster the

uct-based office building and condominium to function-based devel-Group’s executive function. Executive officers have been appointed

opment and management segmentation.

from among our most talented younger employees to spearhead frontline activities and to implement the initiatives of the Top Gear Growth

Urban Property Development DivisionPlan. In conjunction with the introduction of this system, the number of

The Company’s condominium operations are increasingly character-directors has been reduced from 23 to 9. In total, the Company hasized by a shift toward urban central, high-rise and large-scale devel-appointed 29 executive officers, 14 of whom are new to the role.

opments. Thus, location, development and design methods for high-rise

Focusing on youth, 9 executive officers are aged in their forties withcondominiums have come to resemble that of office buildings.

the youngest 43 years of age.

Accordingly, we have integrated the development operations of bothbusinesses to a single division. In this manner, we hope to leverage

Performance-Based Compensation System

the experience and expertise garnered through our office building

Our existing compensation system for directors is comprised of threedevelopment business in large-scale high-rise developments and thecomponents: a fixed monthly remuneration; an annual bonus deter-

assemblage of land packages through our direct workforce to bolster

mined at the end of each fiscal year; and a retirement allowance com-

our activities in the condominium market.

prised of a fixed portion and a portion calculated based on performance. Sumitomo Realty has introduced a new performance-based

Urban Property Management Divisioncompensation system based on an all-inclusive figure linked to the

In its office building business, Sumitomo Realty currently manages a

Company’s performance, specifically 1% of annual consolidated ordi-

total exceeding 500,000 tsubo (approx.1,653,000m2). On the other hand,nary profit.

the Company is developing approximately 50,000 tsubo (approx.
165,000m2) per year. Accordingly, our office building business has

4 Sumitomo Realty & Development Co., Ltd.

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been shifting heavily toward building management. This is the reason

New Business Planning Section

why the Company established the Urban Property Management

Sumitomo Realty has positioned the creation of new businesses as

Division, which includes a portfolio of approximately 200 office build-one of the major priorities in the Top Gear Growth Plan. Taking up theings. At the same time, we integrated the operations of the condo-

challenge, we established the New Business Planning Office to deliv-

minium management department. Our goal is to utilize the knowledge

er innovative ideas in new businesses and to lay the foundation forgained through our office building management activities andour next leap forward.

increase efficiency by integrating our network of urban large-scale
office and condominium, and ultimately enhance our service quality.

We are devoting all of our efforts toward attaining the goals of the
Top Gear Growth Plan, and ask our shareholders for their continued

Housing Business Division

understanding and support in this endeavor.

Sumitomo Realty combined standardized custom housing operations,in the market for new detached houses, handled by Housing Business
Division I and the Shinchiku Sokkurisan business, in the remodelingmarket, handled by Housing Business Division II, into a single housing division. Through this initiative, we will strive to eliminate duplication in sales offices nationwide between the two divisions, suc-

Junji Takashima

cessfully introduce the Shinchiku Sokkurisan business model to our

President

custom house construction business through the introduction of sales

June 29, 2004

personnel with engineering qualifications and the use of exclusive
sub-contractors, and establish a more efficient business promotion
structure.

Affiliated Companies Division
Focusing on improving the consolidated performance of the Group, weestablished the Affiliated Companies Division. Through this newly
established unit, we will actively participate in the management,
strategic planning, and business development of each Group company, ensure the efficient allocation of management resources throughout the Group and maintain Group-wide management consistency.

Sumitomo Realty & Development Co., Ltd. 5

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AT A GLANCER EV EN U E F ROM OPERATION S*

OPERATIN G I NCOME

SAL ES COM POSI TI ON( B i l l i ons of yen)

(B i l l i ons o f ye n)(2 00 4)

193.0
152.8

164.6

202.8

45.8

46.4

53.3

49.2

52.7

178.0

34%

L EA S I NG

2000

2001

2002

2003

2004

2000

2001

2002

2003

24.4

25.8

2002

2003

2004

213.3
170.4
150.5

183.7
32.3

149.2

S A LE S

2000

2001

2002

113.5

115.3

2003

2004

124.5

125.1

18.6

19.7

2000

2001

36%
2004

8.2
7.0

21%

87.2

CONSTRUCT ION

4.8

4.8
4.0

2000

2001

2002

2003

36.2

37.6

2004

2000

2001

2002

2003

8.0

7.8

8.7
31.9

34.9

39.8
7.2

2004

8.5

7%

BRO KERAG E

2000

2001

2002

2003

2004

2000

2001

2002

2003

2004

*Includes intersegment transactions
Note: In addition to the above four major business segments, Other Businesses commanded approximately 2% of total sales in the fiscal year ended March 31, 2004.
Other Businesses include restaurant and fitness club operation and management, finance and other activities.

6 Sumitomo Realty & Development Co., Ltd.

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THE SUMITOMO REALTY & DEVELOPMENT GROUPThe Sumitomo Realty & Development Group is comprised of Sumitomo Realty &Development Co., Ltd., 27 consolidated subsidiaries and others. Major consolidat-

Ltd.
Of its major consolidated subsidiaries, Sumitomo Real Estate Sales Co., Ltd.

ed subsidiaries are Sumitomo Real Estate Sales Co., Ltd., Sumitomo Fudosan

and Universal Home Inc. are publicly listed companies on the First Section of the

Syscon Co., Ltd., Sumitomo Fudosan Tatemono Service Co., Ltd., Sumitomo

Tokyo Stock Exchange and the JASDAQ market, respectively.

Fudosan Finance Co., Ltd., Universal Home Inc., and Shintoshin Real Estate Co.,

Principal activities and major Group companies within each business seg-

Profi l e

L E A S I N G : OFFICE BUILDING , CONDOMINIUM AND OTHER PROPERTY LEASING AND
MANAGEMENT AND RELATED ACTIVITIESWithin the leasing business, the Urban Property Management Division of Sumitomo Realty is responsible for leasingof office buildings and luxury condominiums and the Urban Property Development Division of Sumitomo Realty for theacquisition and development of land for the leasing business. In addition, Sumitomo Realty masterleases almost allof the property holdings owned by Group companies, such as those owned by Shintoshin Real Estate Co., Ltd., andoperates a sub-lease business. Sumitomo Fudosan Tatemono Service Co., Ltd. is engaged in the property management of office buildings and luxury condominiums leased by Sumitomo Realty.

S A L E S : MID - AND HIGH - RISE CONDOMINIUMS , DETACHED HOUSES AND HOUSING LOTDEVELOPMENT AND SALES , AND RELATED ACTIVITIESThe Urban Property Development Division of Sumitomo Realty 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 in sales
activities together with Sumitomo Real Estate Sales Co., Ltd., while management of condominiums after completion
are the responsibility of the Urban Management Division of Sumitomo Realty and Sumitomo Fudosan Tatemono Service
Co., Ltd.

C O N S T R U C T I O N : DETACHED HOUSES , MID - AND HIGH - RISE CONDOMINIUMSAND OFFICE BUILDING CONSTRUCTION AND REMODELING AND RELATED ACTIVITIESSumitomo Realty’s Housing Business Division works on the construction of new detached houses as well as house
remodeling and the Company’s full remodeling package Shinchiku Sokkurisan, advertised as an alternative to “scrap
and build.” Sumitomo Fudosan Syscon Co., Ltd., is engaged in house 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.

B R O K E R A G E : BROKERAGE AND SALES ON CONSIGNMENT OF REAL ESTATE AND
RELATED ACTIVITIESSumitomo Real Estate Sales Co., Ltd. serves as an intermediary in the purchase and sale of real estate and is engaged
in newly built residential property sales agency services.

Sumitomo Realty & Development Co., Ltd. 7

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OUR HISTORY

1949

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

1957

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

1963

Mergered the holding company of the former Sumitomo zaibatsu during its liquidation.

1964

Entered the condominium sales business with the “Hama-Ashiya Mansion,” located in Kobe, Hyogo Prefecture.

1970

Listed stocks on the Tokyo and Osaka stock exchanges.

1973

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

1974

Completed construction of the 52-story “Shinjuku Sumitomo Building” in Shinjuku, Tokyo, and company headquarters moved there from theTokyo 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 the 30-story “Shinjuku NS Building” in Shinjuku, Tokyo; company headquarters moved there from Shinjuku
Sumitomo Building.

1995

Commenced “American Comfort” standardized housing construction business.

1996

Commenced “Shinchiku Sokkurisan” remodeling business.

1997

Entered the high-quality business hotel business. Opened “Villa Fontaine Nihonbashi,” and hotels at two other locations.

1998

Sumitomo Real Estate Sales Co., Ltd., a consolidated subsidiary listed stocks on the Tokyo Stock Exchange.

1999

Universal Home Inc., a consolidated subsidiary listed on JASDAQ (over the counter with the Japan Securities Dealers Association).
Commenced real estate joint development 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 the “Izumi Garden” (Roppongi 1-Chome Redevelopment project).
Commenced sales of the 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.”

8 Sumitomo Realty & Development Co., Ltd.

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LEASINGOUTLINE OF OPERATIONSOUTLINE

Concentration in Tokyo

Sumitomo Realty made its full-scale entry into the leasing business in the latter half of the 1970s, later than its maincompetitors. For this reason, the Company has worked tirelessly to create new opportunities through innovative initiatives, in an effort to reach and surpass its rivals. Today, Sumitomo Realty is positioned as an industry leader inthe supply of cutting-edge quality office buildings for lease.

92%

SUMITOMO REALTY’S STRENGTHS
1. An outstanding leasing portfolio, achieved through concentration in central Tokyo

Central 3 wards (Chiyoda, Minato, Chuo) ............................................................................. 49%
Central 5 wards (central 3 wards plus Shinjuku and Shibuya) ........................................... 72%

Young Port folio

Central 7 wards (central 5 wards plus Shinagawa and Bunkyo) ........................................ 82%
All 23 wards ............................................................................................................................ 92%

The concentration of commercial activity in central Tokyo continues to increase, particularly in the service sector.

92%

Sumitomo Realty’s leasing portfolio, heavily weighted in central Tokyo, offers both stable revenues and the potential for
future growth.

2. A portfolio comprised of many comparatively new, upscale buildings
Buildings less than 10 years old ..................................................................................................... 46%
Buildings less than 20 years old* ................................................................................................... 92%*Two of the Company’s major properties, the Shinjuku Sumitomo Building and the Shinjuku NS Building, are included in this category because, although they are more than 20 years
old, they are super high-rise buildings with high-performance facilities and offer earthquake resistance in excess of the standards of newer buildings.

Shinjuku Oak CityAs the IT revolution continues, the level of support facilities required by office building tenants grows day by day,and buildings that do not provide IT support or earthquake protection are quickly becoming less desirable. As manyof Sumitomo Realty’s buildings are of recent construction, they retain their competitive edge with tenants. All newbuildings completed since 1997, not to mention buildings now under construction, offer quake-absorbent structuresand separate climate control systems for each suite, as well as reinforced floors for heavy loads, high-capacity electricity systems, high ceilings and many other features to satisfy most tenants’ requirements. In addition, as our buildings are newer, they require little investment in refurbishment, allowing more funds to be allotted to investment in
new construction.
3. Direct involvement in operations, with deep knowledge of building development and management
Sumitomo Realty gets directly involved in sorting out the complex tangles of land ownership and rights in assembling land packages for the development of office buildings. This has significantly reduced the cost of acquiring landfor development, since the Company is able to buy smaller lots at lower prices, assembling them into a larger unit
which then increases in value and adds to development profit. The practice has also helped the Company accumulate a wealth of in-house expertise in land acquisition and development.
The Company’s highly capable sales personnel maintain constant contact with potential corporate clients, quickly identify needs for relocation or additional floor space and negotiate lease arrangements directly with the tenants.
This allows pricing to be determined without interference from third-party real estate agents, and makes it possible
to develop new office buildings that reflect future trends, offering the latest specifications and requirements.
Sumitomo Group personnel also directly manage the Company’s office buildings. This allows the Company toaccurately and promptly identify a tenant’s need for relocation or larger space, and offer meticulous service to eachof its clients.

Sumitomo Realty & Development Co., Ltd. 9

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LEASINGPERFORMANCE

amount of overall contracted floor space in the

Tower and the Sumitomo Fudosan Shinjuku Oak

In fiscal 2004, the market for office space insecond half increased, approaching levels not

Tower and new capacity realized from such

Tokyo, an area in which over 90% of Sumitomo

seen since the bubble economy years, and vacan-sources as the Sumitomo Fudosan Hongo

Realty’s lease properties are located, wascy rates looked to be bottoming out with the mar-

Building, resulted in rising income for the leas-

impacted by a slow economy and prolonged

ket entering an upward trend. Under these cir-ing division overall. Revenue from the leasing

deflation. A peak supply of large-scale officecumstances, rents for newly constructed build-business increased ¥9,797 million from the pre-buildings entering the market also meant thatings showed signs of a recovery and the decline

vious fiscal year to ¥202,776 million, exceeding

demand was not strong enough to absorb sup-in rents for existing large-scale competitive build-the ¥200,000 million mark for the first time. On

ply. As a result, the market experienced anings appears to have halted.

the other hand, operating income declined
slightly to ¥52,657 million, a fall of ¥604 million.

increase in vacancy rates in the first half andAmid this business environment, althoughcontinued downward pressure on rents. However

the leasing division experienced a drop in

these conditions presented opportunities forincome from existing buildings during the peri-

OUTLOOK

companies undergoing corporate office space

od under review due to the rise in vacancy rates,

Buoyed by an improvement in overall corporate

reorganization and restructure. Accordingly, thea full year of operations from the Izumi Garden

earnings, the economy appears on a recovery

Izumi Garden Tower

footing. Integration and consolidation needs arestill very strong and there are signs of anincreased demand for floor space in the Tokyo
Metropolitan area. The temporary increase in
the supply of large-scale buildings experienced
during 2003 is expected to decline throughout
2004 and for the foreseeable future, and themarket to enter a period of self-correction due
to improved balance between supply anddemand. Office buildings that offer better facilities will attract demand and older buildings willlose their competitive edge. Against this backdrop, Sumitomo Realty will continue to pursue
development of state-of-the-art office buildings.
Examining the Company’s leasing portfolio,
efforts to attract tenants for newly completedbuildings have concluded, and for projects inprogress such as the Shiodome Sumitomo
Building, we are well on track to meet our objectives.
In the fiscal year ending March 31, 2005,
Sumitomo Realty plans to establish a real estate
investment trust (J-REIT) and sell off its operating portfolio for approximately ¥100 billion to theCompany’s newly incorporated real estate
investment corporation. On this basis, Sumitomo
Realty is forecasting revenue in fiscal 2005 of¥201,000 million and operating income of¥50,000 million.

10 Sumitomo Realty & Development Co., Ltd.

住友不動産-p6色変更 04.9.3 6:27 PM ページ 11

LEASING
Leasing Business
Revenue & Operating Income(Billions of yen)
153
165
46
46

178
49

193
53

203
53

201
50

250

50

200

40

150

30

100

20

50

10

0

2000 2001
Revenue

2002

2003

2004

2005F

Operating Income

Yield on Leasing Assets
(%)
6.2
3.7

6.5
3.8

6.2
4.2

6.3
4.5

6.0
4.7

6.0
4.7

1999

2000

2001

2002

2003

2004

8

6

4

2

0

Yield on Properties in Operation
Yield on Total Leasing Assets(Incl. underconstruction and land for development)

Chiyoda First West Building

TOPICS—SHIODOME SUMITOMO BUILDINGThe Shiodome Sumitomo Building will be completed in August 2004. Ideally situated, access is unaffected by weather conditions, located above and one minutefrom Shiodome subway station and six minutes by underground walkway to Shinbashi railway station. The building offers the latest specifications and facilities,
brief details as follows.
·Astylar open floor plan, each floor 3,640m2·Uninterruptible power supply system·Individual climate control systems, each floor divided into 99 zones·Mid-rise sections equipped with quake-absorbing protection, earthquake-proof construction to
reduce the impact of earthquakes and typhoons by a maximum of 80%·Standard ceiling height for each floor 2.8m: IT and dealing room specifications, floor 3.0m
·Standard raised floor construction for each floor 10cm: IT and dealing room specifications, floor
30cm·Reinforced floors for heavy loads, 500kg/m2 (1,000kg/m2 in certain sections)·State-of-the-art floor security, each rentable area entry equipped with non-contact IC card system·24-hour/365 day building management support

Shiodome Sumitomo Building

In addition, the 497-room Villa Fontaine Shiodome hotel is scheduled to open as part of the Shiodome
Sumitomo Building complex in October 2004. Directly operated by the Sumitomo Realty Group, the Villa
Fontaine chain is a network of high-quality business hotels servicing central business districts. Completionof Villa Fontaine Shiodome will bring the total number of hotels to 10 with an aggregate of 1,838 rooms.

Sumitomo Realty & Development Co., Ltd. 110住友不動産-p6色変更 04.9.3 6:28 PM ページ 12

SALES
OUTLINE
Comprising the core of Sumitomo Realty’s sales
business, development and sales of condominiums
accounts for more than 95% of total sales in thissegment. Sumitomo Realty commenced its condominium sales business earlier than almost all of
its competitors, earning the distinction of being
the pioneer in condominium development for salesin Japan. The Company’s condominium operations
are focused mainly in Japan’s six largest urban
areas: the Tokyo metropolitan area, Osaka/Kobe,
Sapporo, Sendai, Nagoya, and Fukuoka.
Following on from 2002, Sumitomo Realty
ranked second nationwide in 2003 in terms of thenumber of units provided. Looking ahead, theCompany will carry out its operations with the aimof firmly maintaining a high ranking and continually expanding its business.
Sumitomo Realty’s investment turnover ratio
and high operating profit margin are at the top ofCity Tower Takanawa

the industry. Since market fluctuation risk canoften determine the fate of the condominium busi-

high-rise condominium projects which began

works to achieve total sales six months after

ness, it is the policy of the Company to level thissales in Tokyo and Osaka in 2002.

construction has completed, with no discounts.

market risk by offering stable supplies and pursu-

In adopting this philosophy, Sumitomo Realty is

ing brand enhancement strategies through the

2. Efforts on post-construction sales, returns

able to earn a profit that accurately reflects thecontinued sale of high-quality units and products.

that accurately reflect quality

quality of each project, and to secure an operat-With a primary focus on investment turnover,ing profit margin that leads the industry.

SUMITOMO REALTY’S STRENGTHS

general practice in the condominium market is to

1. Direct involvement in operations, prompt

secure sales prior to construction completion.

PERFORMANCE

response to customer needs

Given these conditions, discounting is part andSupply in the Greater Tokyo area has remained

As with its leasing business, Sumitomo Realty

parcel of condominium sales, as developers work

constant at more than 80,000, buoyed by favor-

and the entire Sumitomo Realty Group engage

to eliminate risk and the need to carry post-con-able market conditions, such as a tax deduction

directly in purchasing land for development,

struction inventory. Since condominiums are anallowance for housing loans and stable low

planning products, selling condominium units

expensive item for customers, selling off the planinterest rates. Downtown high-rise condomini-and managing properties after condominium

is not a satisfactory sales procedure, because

ums and large-scale properties near train sta-sales. This approach enables the Company tothey cannot truly grasp the extent of the added

tions drew the attention of consumers, andprovide high-quality products and well-focusedvalue and the usability of common area facilities.

improvements in location and product offering

service with feedback of customer needs. As a

In an effort to cultivate high customer sat-led to continued support from a wide demo-

result of this direct involvement, Sumitomo

isfaction and to avoid the impact brought aboutgraphic encompassing both single persons andRealty has been able to stay ahead of market

by discounting on profits, Sumitomo Realty

the elderly. As a result, sales prices for condo-

needs and has actively promoted business devel-

adopts a new approach to the sale of condo-

miniums in Tokyo remain comparatively stable,

opment in tune with modern-day requirements,

minium units. As a rule, the Company places

while sales prices for ordinary properties in the

culminating in the City Tower series of five super

equal effort on post-construction sales andsuburbs continue to fall. In addition, in other

12 Sumitomo Realty & Development Co., Ltd.

住友不動産-p6色変更 04.9.3 6:28 PM ページ 13

SALES
major cities, the trend toward relocation to thecity center has also been notable.
Under these circumstances, total sales ofcondominiums, houses and residential land

Sales Business
Revenue & Operating Income

keting efforts.

In fiscal 2005, revenue from the sales busi-(Billions of yen)
151
149
19
20

ness is expected to reach ¥254,000 million and

170
24

184
26

213
32

254
36

operating income ¥36,500 million.

amounted to 4,473 units, 26 less than in the pre-Although competition to acquire land forvious fiscal year, underpinned by steady urban

large-scale urban projects is growing increasingly

sales of large-scale condominium projects includ-fierce, and the price of land has risen noticeably,

ing the Tower series in Ikebukuro, Osaki, Yotsuya,

as a result of Sumitomo Realty’s shift toward

Takanawa, and Osaka. Revenue from the salesacquiring land in central urban locations wherebusiness rose ¥29,558 million from the previous

demand is high, we are well positioned and wellfiscal year to ¥213,303 million, and operating

under way in our procurement of sufficient land

income increased ¥6,493 million to ¥32,280 mil-for future development through to 2007.

300

30

200

20

100

10

0

lion, a significant jump in income and profit.

2000 2001
Revenue

2002

2003

2004

2005F

Operating Income

Ranking among Condominium
Suppliers(Units)
3,885
7th

OUTLOOK
Although concerns over an increase in interest rates

4,278
6th

4,335
3rd

4,580
2nd

5,309
2nd

5,000

and possible moves to limit the tax deduction for
housing loans have brought some uncertainty to the

4,000

market, the current sales market is seen on a sound

3,000

footing, evidenced by an increase in the number of

2,000

visitors to sales showrooms in the second half offiscal 2004 and the volume of contracts. Sumitomo

1,000

Realty is scheduled to complete two high-rise pro-0

jects, City Tower Shinjuku Shin-Toshin (due for

1999
2000
2001
2002
2003
Number of Units Supplied (Calender Year)completion in fiscal 2005) and World City Towers(due for completion during fiscal 2006 and 2007).
The Company will utilize its strengths in developing such large-scale condominiums to step up mar-

City Tower Osaka

TOPICS—WORLD CITY TOWERSWorld City Towers, for which sales commenced in May 2004, is Japan’s largest private-sector condominium project undertaken by a single developer. The project comprises three towers, the highest stretchingto 42 stories, with a total of 2,082 units. A waterfront property, located in the prestigious and centrally located Minato ward, this project is being developed under an urban resort concept. Leveraging the benefits ofa large-scale development, World City Towers also provides all living requirements within the complex. The
projects principal facilities and specifications are summarized briefly as follows.

World City Towers·The first Tokyo Bay condominium project to offer a pier for charter cruising·Super Relaxation Center, including a swimming pool and gymnasium offering ocean views·Spectacular views from the Sky Garden and Sky Dining, located 130m above ground level for use by all
residents·24-hour supermarket·Accredited day-care center (planned)·Financial institution·General medical clinic·24-hour manned building management and security system·Exclusive shuttle bus service to Shinagawa station

Sumitomo Realty & Development Co., Ltd. 13

0住友不動産-p6色変更 04.9.3 6:28 PM ページ 14

CONSTRUCTION
In the construction business, Sumitomo Realty

sagged over the past several years. In Octoberarea, for which a house can be fully remodeled

undertakes mainly custom house construction

2002, Sumitomo Fudosan Home Co., Ltd.’s oper-

at half the cost of rebuilding, and in half theand house remodeling.

ations were merged with the parent company,

time. This pricing system was made possible due

which now has full control over these operations.

to our unique operations, with sales personnel

PRODUCT LINEUP

In

new

having engineering qualifications and our net-

1. New Detached Houses

Mediterranean style home, expanding its design

work of exclusive sub-contractors. The market-

The Company has in the past contracted con-portfolio to cover nine styles from seven coun-ing slogan “Sono tatekae matta!” (Hold off on

struction of detached houses from customers whotries, and changed the brand name for the line toyour rebuilding!) has helped enhance the appeal

bought subdivisions the company developed. In“Series of World Home Designs.” In April 2003,of the product. It has become popular as an1982, however, it split off this business andSumitomo Realty launched the urban home design

alternative to rebuilding, and is demonstrating

established Sumitomo Fudosan Home Co., Ltd. to“J-Urban,” with higher quality luxury condomini-

impressive performance.

develop the business for construction of detached

um interiors.

2002,

the

Company

addeda

PERFORMANCE

houses. In the early years of this business,
Sumitomo Fudosan Home adopted designs and2. The Shinchiku Sokkurisan Full RemodelingIn the market for new detached houses, the end

construction methods used in and around Los

Packageof tax-reduction measures (subsequently extend-

Angeles by its sister company in California,

In the remodeling market in Japan, an outdateded) and fears of an increase in interest rates,

Sumitomo Realty & Development, CA Inc. (then La

construction system keeps prices high, and there

prompted an increase in demand and housing

Solana Corporation). Its mainstay products wereis always a risk of cost overruns. It is widely

starts, the first signs of a recovery.

custom-designed, midrange and upscale two-by-believed that it is less expensive to simply

In the fiscal year ended March 31, 2004, thefour constructed houses. Because competition

rebuild. Sumitomo Realty overturned this com-

number of new detached houses completed fell

from large builders of midrange and upscale hous-

mon assumption in 1996 with the development

by 206, compared with the previous fiscal year,

es was intense, however, Sumitomo Fudosanof Shinchiku Sokkurisan, which provides the cus-

to 2,043 units, reflecting a drop in the number ofHome had to continually struggle without muchtomer with a transparent fixed price per floor

orders received during the second half of fiscal

growth, building just around 1,000 units per year.
The standardized housing business, howev-

Afterer, taking a hint from the construction of emergency housing for victims of the Kobe earthquake,
began operations in 1995 with the launch of theAmerican Comfort line of high-quality, low-cost,Western-style standardized houses. Although thisbusiness has attracted a good deal of attention
in the industry achieving an annual growth rateof over 30%, the number of competing productsin this price range has increased, and growth has
BeforeShinchiku Sokkurisan

14 Sumitomo Realty & Development Co., Ltd.

住友不動産-p6色変更 04.9.3 6:28 PM ページ 15

CONSTRUCTION
2003. Orders received were on par with the pre-Company will expand its sales network with “J-vious fiscal year for a total of 2,083 units. In the

Urban” model homes, first launched in April 2003,

remodeling market, however, orders received

and at the same time bolster its sales structure toincreased by 722 year on year to 4,843 units

capture the expected customers from these newfueled by an increase in the number of sales staff

models. The Company will continue to reinforce theand efforts to reinforce the sales structure. The

Shinchiku Sokkurisan business through an increase

number of constructions completed climbed byin personnel, which will increase sales capacity and421 to 4,391 units and together with orders

serve to broaden the appeal of the brand. Group

received, registered double-digit growth.

company, Sumitomo Fudosan Syscon Co., Ltd. will

In total, revenue from the construction business, which includes Universal Home Inc., a fran-Construction Business
Revenue & Operating Income(Billions of yen)
87
114
4.8
4.0

115
4.8

124
7.0

125
8.2

140
9.5

200

8

150

6

100

4

50

2

carry on efforts to expand sales of Reform Choice,a fixed price, partial refurbishment product.

chiser specializing in standardized houses using theThrough these measures, Sumitomo Realty

conventional construction methods, and Sumitomo

anticipates revenue in this segment of ¥140,000

Fudosan Syscon Co., Ltd., a company which

million and operating income of ¥9,500 million in

engages in general refurbishments and interior andfiscal 2005.

02000 2001
Revenue

2002

2003

2004

2005F

0

Operating Income

Housing Units Sold by
Product Type
(Units)
1,569
2,405

2,951
2,801

3,770
2,362

4,121
2,083

4,843
2,083

5,600
2,200

exterior work, increased ¥622 million to ¥125,086
5,000

million, while operating income rose markedly,
4,000

climbing ¥1,219 million to ¥8,211 million.

3,000

OUTLOOK
2,000

Sumitomo Realty will work Shinchiku Sokkurisan
1,000business systems in with new detached housing
operations in line with integration. In addition, the0Cote d’Azur, World Home Designs

2000 2001 2002
Shinchiku Sokkurisan

2003 2004 2005F
New Detached Houses

TOPICS—J-URBAN HOME
Residential neighborhoods in Japan are densely built-up, and most of the lots are small, creating problems for homeowners including limited access to sunlight and apprehensions about security. The J-Urban design eliminates theseconcerns, offering a comfortable living space ideally suited to the urban lifestyle.

J-Urban

MAIN FEATURES
Outer façade in harmony with the urban environment
Beginning with a modern exterior that emphasizes the simple beauty of straight lines, high-grade materials such as
glass and stone are employed to create a façade to please any connoisseur of urban design.
New techniques and designs for better lighting and security
Sumitomo Realty has developed for J-Urban a structural wall known as Light Wall (patent pending). This innovative
product incorporates numerous openings that provide light without sacrificing earthquake resistance, and allows forsecurity-conscious planning of the building exterior.

J-Urban Patio

Private internal patio
Instead of providing open space around the building, the design provides an open, private patio at the center of thestructure, offering a space to enjoy the sun and fresh air without concern for the outside world.
Amenities on a par with an upscale condominium
Kitchen and bath facilities standard with J-Urban are the same as those used in luxury condominiums and better than
the standards for detached houses, providing an air of opulence to the home.
Fixed price system
As long as the total architectural area remains the same, the final plan can be changed to accommodate the site conditions without changes in the price.

Sumitomo Realty & Development Co., Ltd. 15

住友不動産-p6色変更 04.9.3 6:28 PM ページ 16

BROKERAGEOUTLINEand the decline in the average contract price inBrokerage Business
Revenue & Operating Income

The Company’s real estate brokerage businessthe Osaka region narrowed.

(Billions of yen)
32
35
7.2
8.7

is conducted through Sumitomo Real Estate

Amid this environment, the brokerage busi-

Sales Co., Ltd., which was established in 1975

ness opened five new brokerage offices in fiscal

to handle the sale of condominiums developed

2004, bringing the total network to 211, reno-

by Sumitomo Realty. It entered the real estatevated several existing offices, and in July 2003,

brokerage sector in 1979, where it has achieved

strengthened its IT strategy by introducing My

significant success, and was subsequently list-

Page, an online property information search sys-

ed on the Tokyo Stock Exchange in 1998.

tem. As a result, the number of properties han-Sumitomo Real Estate Sales operates a net-dled and the volume of transactions in fiscal

work of community focused branch offices under2004 were a record for the Company. Revenue

the “STEP” brand name. The number of offices

from the brokerage business increased ¥2,232

reached 211 by the end of fiscal 2004, and thismillion year on year to ¥39,809 million, while

expanding and upgrading of the network of bro-

operating income rose ¥746 million to ¥8,538 mil-kerage offices has helped to steadily grow thelion. With these results, we achieved growth inbusiness. All brokerage offices are directly owned

profits for the first time in three years.

36
8.0

38
7.8

40
8.5

42
9.0

40

8

30

6

20

4

10

2

0

2000 2001
Revenue

2002

2003

2004

2005F

Operating Income

Brokerage Transactions
26,95325,00023,051

23,96824,436

21,431and operated and boast high profit margins.

20,00015,000Sumitomo Real Estate Sales holds the No. 1 posi-

OUTLOOKtion in the industry in terms of brokerage revenues

Operating conditions in fiscal 2005 are expected

10,000through direct operations.

to remain favorable. Based on continued improve-

5,000

The company plans to further expand its mar-ment in the general economy, the Company isketing base and steadily increase its market share.

anticipating an increase in the number of trans-

0

2000
2001
2002
2003
Number of brokerage transactions

2004

actions handled and the year-on-year decline in

PERFORMANCE

the average contract price to narrow. Against thistial property sellers. Sumitomo Realty will also

In the fiscal year under review, the number ofbackdrop, Sumitomo Realty will work to increase

look to expand its business activities catering toproperty acquisitions, particularly by first-timerevenue and profits and to further expand its mar-the corporate sector and high-income investor,

buyers, and overall market transactions increased

ket share. To this end, the Company will contin-

two markets earmarked for significant growth.

reflecting an improvement in economic condi-

ue to open new branches, renovate existing

The Company is projecting revenue of ¥42,000

tions. The average contract price for existing

offices, and upgrade the My Page information ser-million and operating income of ¥9,000 million in

condominiums in the Tokyo area continued to rise

vice to include an access page catering to poten-

fiscal 2005 in the real estate brokerage business.

TOPICS—GOOD DESIGN AWARD (Architecture and Environment Design Category)In 2003, Sumitomo Realty was awarded three separate Good Design Awards in the architecture and environmental design category, sponsored by the Japan
Industrial Design Promotion Organization, for its work on an urban redevelopment office building project, condominiums, and new detached houses. Recognitionin three separate fields is a reflection of the quality of our staff and the across-the-board expertise held by the Company.
Izumi Garden Urban Redevelopment Project

16 Sumitomo Realty & Development Co., Ltd.

The Jingumae City Tower Condominium Project

J-Urban Home0

住友不動産040818入稿/2色 04.9.6 9:32 AM ページ 17

FINANCIAL SECTION

18

Corporate Development and Financial Background22

Consolidated Balance Sheets

24

Consolidated Statements of Income

25

Consolidated Statements of Shareholders’ Equity

26

Consolidated Statements of Cash Flows

27

Notes to Consolidated Financial Statements

39

Independent Auditors’ Report

Sumitomo Realty & Development Co., Ltd. 17

住友不動産040818入稿/2色 04.9.6 9:32 AM ページ 18

CORPORATE DEVELOPMENT AND FINANCIAL BACKGROUND

1950 TO 1993 FISCAL YEARSFOUNDING THROUGH THE COLLAPSE OF THE BUBBLE

adopted more than two decades ago.
The collapse of the bubble economy in the early 1990s, however, thrust theCompany, which to this point had been pursuing a growth strategy, into dire straits.

Sumitomo Realty was formed from the dissolution of the Sumitomo zaibatsu, one

First to suffer was the Company’s sales division, which was left with large quan-of the four major family-dominated financial and industrial combines that had large-

tities of leftover properties for sale when the retail price for condominiums, whichly controlled the Japanese economy until the end of the Second World War.

had been rising rapidly, began to tumble. The brokerage division soon after saw

Inheriting the respected Sumitomo brand, each Sumitomo company became an

its operating income fall to half its former level as the volume of land transactions

independent entity, Sumitomo Realty was one such company, incorporated in 1949

dried up and prices collapsed. Next to be hurt was the financing business, which

within the Sumitomo Group to manage the residual real estate assets of the zaibat-

had grown rapidly by providing real estate loans using rising land prices as col-su. The brand name, however, was one of the few assets the Company inherited.

lateral, falling into the red as bad debts mounted. Finally, earnings in the leasing

In comparison with Mitsubishi Estate, which became heir to the entire Marunouchi

division began to fall as the vacancy rate skyrocketed due to the burgeoning sup-area, and Mitsui Fudosan, which took over the real estate business of the Mitsui

ply of office buildings planned during the bubble, while rents spiraled downward.

zaibatsu, Sumitomo Realty was far behind these two giants in terms of assets at

The cumulative effect of this situation was that the Company’s actual earnings

the time of its founding. Mitsui Fudosan and Mitsubishi Estate quickly established(ordinary profit excluding gains from sale of assets) slipped into the red.
These actual losses continued for four straight fiscal periods, from fiscal 1993

stable foundations in the leasing business, and were publicly listed in 1949 and1953, respectively, twenty years ahead of Sumitomo’s listing in October 1970.
At the time of its listing Sumitomo Realty was known as a pioneer in highend condominium development, being one of the first companies in Japan toto 1996. The Company began referring to this period as its second management
crisis (the first being the post-oil shock depression), and formulating measures tolift itself out of the predicament.

engage in that business. With housing developments constituting the major pordid not have a stable base in the leasing business. The recession sparked by the

1994 TO 1997 FISCAL YEARSTHE STRUGGLE TO READJUST

oil shock that occurred soon after the public listing caused the Company to suffer

Sumitomo Realty adopted the following measures to reverse the actual losses andfour consecutive years of ordinary losses. To escape from this management crisis

restore profitability:tion of the Company’s business, the risks involved were great, since the Company

the Company sold off nearly all of the few assets it possessed, including the former headquarters building in Marunouchi. It also withdrew from the business of>large-scale residential land developments, which at the time was considered to be

nizational structure was simplified, including elimination of more than half the

To reduce personnel expenses and maintain a sense of crisis, the orga-

the defining element of the real estate development business. It instead turned its

general manager positions (64 positions to 27), and salaries for both manage-

attention to two areas from which high performance could be expected from lim-

ment and senior staff were reduced.

ited capital: condominium developments, and the leasing of office buildings inTokyo. This strategy was a success, lifting consolidated revenue, which only>

New construction of office buildings was suspended, and all development

reached ¥43.2 billion in fiscal 1978 (ended March 31, 1978, the first year the

personnel shifted to office leasing.

Company prepared consolidated earnings statements), seven-fold to ¥300.6 billion
in fiscal 1991. Consolidated operating profit during this period increased by a fac->

To develop and expand businesses not involving acquisition of land (non-tor of 15, from ¥4.4 billion to ¥65.3 billion. The strength of Sumitomo Realty’s cur-land businesses), a large number of employees were shifted to subsidiaries han-rent portfolio, which is heavily weighted with Tokyo properties and contains manydling custom housing construction, house remodeling, and office building man-comparatively new buildings, is a direct result of the success of these strategies

agement.

Revenue From Operations

Operating Income(Billions of yen)(Billions of yen)
96

99

89
80

630
600

574

75

534

71

75

498
459
422
400

50

200

25

0

2000

2001

2002

2003

2004

2005F

18 Sumitomo Realty & Development Co., Ltd.

0

2000

2001

2002

2003

2004

2005F

住友不動産040818入稿/2色 04.9.6 9:32 AM ページ 19>

New non-land businesses were launched, including the American Comfort

development decreased significantly to provide another factor for restoring per-line of standardized housing in October 1995, and the Shinchiku Sokkurisan fullformance. The book value of this land exceeded ¥500 billion in fiscal 1995, but

remodeling package in April 1996.

through aggressive development had been reduced to ¥124.3 billion in fiscal
2001, representing 9% of the leasing business’s assets. This significantly

Fiscal 1995 was the low point in terms of actual earnings, but, bolstered by areduced excessive anticipatory investments, another of the plan’s targets.

recovery in the office building market, the Company managed a return to profitability in fiscal 1997.

Sumitomo Realty relies very little on outside brokers for its office leasing,choosing instead to build an in-house professional leasing team, operated by
the Company itself. The high degree of leasing ability of its in-house profes-

1998 TO 2001 FISCAL YEARSTHE FIVE-YEAR BUSINESS RECONSTRUCTION PLAN
Once the actual losses had been eliminated and profitability restored, Sumitomo
Realty undertook a full-fledged recovery program to reform and restructure its
balance sheets, setting the following four targets, which were accomplished ayear ahead of plan:sional staff is well regarded, and the capacity to gather information realized
from direct leasing is one of the key reasons the Company was able to predictthe market recovery ahead of its competitors.
In the condominium market, demand recovered quickly from 1994, but
because the Company was focusing on disposing of its leftover properties for
sale, and had placed controls on new land acquisition, it was unable to fully
capitalize on this change in the market situation. Total number of units sup->Restore business performance to fiscal 1991 levels (the peak of the bub-plied was approximately 2,500 per year, making the Company around tenth inble years)

the ranking of suppliers nationwide for a couple of years. The specific target>

adopted for the condominium development for sales business under the

Eliminate excessive land inventory for development (begin construction onland acquired for the leasing business)

Business Reconstruction Plan was to expand the business to ensure a stable>supply of more than 4,000 units annually, and increase the Company’s share to

Dispose of nonperforming assets (the financing business, overseas oper-

ations, etc.)

make it one of the top five suppliers. In the year 2000 the Company supplied>

4,278 units, making it the sixth-ranked supplier. Operating profit in the sales

Reduce interest-bearing liabilities (to fiscal 1991 level)

division increased 114%, or ¥10.5 billion over the four-year period.

1. Restoring business performance
Sumitomo Realty seems to have been the first major developer to foresee arecovery in the market for office buildings in Tokyo. Construction was resumed
in 1995, ahead of others in the industry. The Shibuya Infoss Tower was partially completed for early tenants to occupy in 1997, and, backed by a recovery in the market at large, the Company succeeded in acquiring contracts withmany favorable tenants. Although a temporary setback was suffered with the
failures of large-scale financial institutions in 1997, the twelve office buildings
completed during the term of the five-year business reconstruction plan were
all leased to full capacity at the time of their completion. Operating revenue
from these new buildings helped the leasing business to raise its operating
profit ¥13.4 billion, or 41% during this four-year period.
Through early resumption of office building construction, inventory of land for

During the first half of the plan the Company continued selling the condominiums with high book values for land purchased during the bubble period,
but in fiscal 2000 recorded an across-the-board revaluation loss of ¥24.9 billion on properties for sale, a move that improved the operating margin ratio in
this division by 7.5 percentage points. The high margins generated in this division are a defining feature of Sumitomo Realty.
Of Sumitomo Realty’s four core businesses, the leasing and sales businesses can be defined as “speculative production” since they require huge capital investments, as they must acquire land, construct buildings and then leaseor sell these to customers. The construction and brokerage businesses, by contrast, can be defined as ”production by order“ and do not require such a great
investment of capital. Sumitomo Realty has carried out personnel buildups forboth of these businesses in order to create a more sound business portfolio

ROA (%)ROE (%)

4.5
4

15

3.9

4.0

2000

2001

4.7

4.2

11.3
10
5.7

3.2

7.0
3

5

2.5
2.3

0

2

-5
1

-10

(8.8)

-15
0
-20

1999

2000

2001

2002

2003

2004

1999

2002

2003

2004

Note: Operating income divided by total assets

Sumitomo Realty & Development Co., Ltd. 19

住友不動産040818入稿/2色 04.9.6 9:32 AM ページ 20

and improve the operational balance. As a result, operating profit during the>

Securitization of office buildings in Japan (ABS-type)four-year period for the two business types increased by 90%, or ¥6.0 billion.

>

Selling of interests in SURF (Sumitomo Realty & Development Fund), an

investment scheme for office buildings in Japan similar to a U.S.-style limited

2. Disposing of nonperforming assets
Sumitomo Realty decided to withdraw from the financing and overseas businesses because they required a large amount of invested capital and showed
little promise of profitability. The financing business had recorded ¥146.0 billion in losses from the disposal of bad loans, reducing the total value of ordinary loans, which had reached ¥333.0 billion in fiscal 1991, to a mere ¥18.4
billion (net of allowance for bad debts). The overseas business began aggressively selling assets, recording ¥22.6 billion in losses on sales in fiscal 2000.
This reduced the Company’s shareholders’ equity, which had reached ¥176 billion in fiscal 1992, to ¥13.6 billion.
Sumitomo Realty recorded approximately ¥210 billion in extraordinary losses during the reconstruction plan, including expenses incurred from the withdrawal from these businesses. These losses also included revaluation of properties for sale, additional reserves related to the adoption of current value
accounting for retirement benefit liabilities and such financial assets as marketable securities, among other factors. With the exception of impairment
accounting for fixed assets, almost all the unrealized capital losses on assets
had been accounted.

partnership, where Sumitomo Realty acts as general partner

3. Reducing interest-bearing liabilities
Sumitomo Realty began giving priority to the reduction of interest-bearing debt
in fiscal 1999, once the performance recovery was well under way.
As a result of the growth in profits, the Company was able, without increasing debt, to make the substantial capital investments necessary for development of land for office buildings. Since the total of operating cash flow was
devoted to capital investment, however, it became necessary to either recoverinvested capital or liquidate assets in order to reduce debt. Unfortunately, thelarge-scale failure of financial institutions in 1998 severely limited the total
amount of risk capital available to the real estate market, and greater creativity was necessitated.

of real estate securities in Japan, becoming the model for the growing securi->

Assignment of receivables related to condominium sales

Sumitomo Realty chose to sell off certain assets in the overseas and nonperforming loan markets, which had ample supplies of risk capital, but would havebeen forced to sell at lower prices as for domestic investment real estate forwhich there was little risk capital available. The Company therefore injected
capital into certain investment vehicles, easing the risk for investors and allowing capital to be recovered at a reasonable cost to the Company.
For institutional investors who required bankruptcy remote, the Company offereda securitization scheme employing a special purpose company (SPC), and forindividual investors who valued the reliability of the Sumitomo brand, theCompany offered investment in SURF.
After 1999, private equity funds were created in succession, and the number and size of J-REITs grew, resulting in more risk capital flowing into the realestate market. The selling price of real estate for investment recovered as aresult, validating the rectitude of the Company’s strategy of refusing to sell its
assets at reduced prices.
The SumQuest bond issue offered in June 1999 was the first public issue
tization of real estate. By the end of the 2004 fiscal year, the SURF investment
had grown into a large-scale investment product with more than ¥160.0 billion
in investments received.
When real estate properties were securitized, those made bankruptcy
remote by selling off to a SPC were taken off the balance sheet. For SURF,
however, in accordance with accounting standards for such associations, since
the Company was the general partner the total of the asset liabilities were carried on its balance sheets, recorded under fixed liabilities as long-term deposits
payable.
Total interest-bearing liabilities for the Group (the total of debt, bonds,
notes and guarantees) had reached ¥1,686 billion by the end of fiscal 1998.

The principal measures undertaken were:This had been reduced to ¥1,286 billion by the end of fiscal 2001, a reduction>of ¥400 billion during a three-year period. This was roughly the same level as

Disposal of overseas assets and nonperforming loans

2,000

Total Assets

Interest-Bearing Debt

(Billions of yen)(Billions of yen)

1,916

1,904

1,973

2,016

2,091
1,500

1,382
1,286
1,193

1,500

1,140
1,049

1,000
1,000
500
500

0

2000

2001

2002

2003

2004

20 Sumitomo Realty & Development Co., Ltd.

0

2000

2001

2002

2003

2004

住友不動産040818入稿/2色 04.9.6 9:32 AM ページ 21

the Group’s interest-bearing liabilities at the end of the 1991 fiscal year (¥1,242

5% should equal the book value.)
Given these conditions, Sumitomo Realty decided to sell off assets thatbillion), the height of the bubble period.

were impacted by impairment accounting, and record a loss on the sale of such

2002 TO 2004 FISCAL YEARSTHE NEW THREE-YEAR GROWTH PLAN
Sumitomo Realty achieved far-reaching success during the course of theBusiness Reconstruction Plan in restoring performance to its historical highs,
reducing nonperforming assets, and making significant reductions in interestbearing debt. To continue to build on this success and ensure continuing
increases in income and earnings, the Company formulated the New GrowthPlan with the aim of further improving its financial position.

assets. Specifically, the Company reviewed the status of land and buildings in
its portfolio, disposing of raw land, for which development schedules had not yet
been determined and from which no cash flow was expected, as well as currently leased properties whose NOI was less than 2.5% against its book value.
The total book value of assets identified under this standard was ¥143.5 billion.
Almost all of these assets are sold off over two fiscal periods (2003 and 2004),
with a loss on sale of approximately ¥98.1 billion. The Company believes that
this action will severely limit the risks from valuation losses associated with
impairment accounting.

1.

Performance

Nearly all large-scale, listed companies in the real estate industry, until fis-

Comparison of performance results for fiscal 2001 (the year prior to the launch ofcal 2002, made use of special measures in the Land Revaluation Law that allowed

the New Growth Plan) with results for fiscal 2004

them to offset unrealized losses in land against unrealized gains. Certain companies have also taken a special depreciation for buildings with notably high book

Fiscal 2001

Fiscal 2004

Increasevalues. It is often remarked that these measures have alleviated their impairment
accounting risks. Sumitomo Realty did not make use of these special measures,

Revenue fromOperations¥459.2 billion¥573.9 billion+25.0%

preferring instead to resolve the issue by recording losses on sales. The result of

Operating Income¥ 75.2 billion¥ 96.0 billion+27.7%

this difference in approach is that, while these measures impact corporate return

Ordinary Profit¥ 38.5 billion¥ 66.0 billion+71.4%

on assets by increasing certain book values of assets, Sumitomo Realty’s approach
avoids this adverse effect.

The Company reported consecutive increases in revenue and profit for all four
core businesses (Leasing, Sales, Construction and Brokerage) for each of the three3.

Improving the financial position

fiscal periods of the New Growth Plan.

Interest-bearing liabilities continued to reduce under the New Growth Plan. As of
March 31, 2004, interest-bearing liabilities totaled ¥1,048.6 billion. This repre-2.

Anticipating the introduction of impairment accounting

sented additional cuts of approximately ¥240 billion during the three-year period

Japan’s Business Accounting Council resolved in August 2002 to require impair-from the end of fiscal 2001. Accounting for cash, time and notice deposits ofment accounting for fixed assets from the 2006 fiscal year. For the real estate¥132.5 billion, net interest-bearing liabilities amounted to ¥916.2 billion.

industry, impairment accounting applies mainly to lease properties, and will be

Shareholders’ equity as of March 31, 2004 was ¥303.9 billion reflecting an

required when an asset’s undiscounted future cash flow for a total of 20 years

additional public offering in March 2004. As a result, the net debt-to-equity ratio(including income from the sale of the asset 20 years hence) falls below its book

improved to three times.

value. A basic rule-of-thumb measure is that assets with a net operating income(NOI) less than 2.5% against book value will require impairment accounting. (Solong as the NOI is at least 2.5%, the combined total of operating income over a
20-year period and the expected income from sale of the asset at a cap rate of20

Net Debt / Operating Profit Ratio

Net Debt / Equity Ratio(Times)(Times)

8

18.4
15.5

15

6.2

6.1

6

13.5

5.1

11.6
9.4

10

4.9

4
3.0
2

5

0

2000

2001

2002

2003

2004

0

2000

2001

2002

2003

2004

Sumitomo Realty & Development Co., Ltd. 21

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 22

CONSOLIDATED BALANCE SHEETSAs of March 31, 2004 and 2003
Thousands of
U.S. dollars (Note 1)

Millions of yen

AssetsCurrent assets:Cash, time and notice deposits (Note 3)
Marketable securities (Note 7)
Securitized properties for sale (Note 7)
Notes and accounts receivable—trade
Trading loans receivable
Allowance for doubtful accounts
Inventories (Note 4)
Deferred income taxes (Note 11)
Other current assets
Total current assets

2004

¥

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 (Note 6)
Deferred income taxes (Note 11)
Other
Total other assets¥
See accompanying notes.

22

Sumitomo Realty & Development Co., Ltd.

132,474517
44,47336,252
83,782(36,537)
189,547
12,60240,801
503,911

2003¥

101,700
18
27,98024,90289,512(37,904)
161,156
14,361
41,721
423,446

2004$

1,253,420
4,892
420,787
343,003792,715(345,700)
1,793,424
119,236
386,044
4,767,821

6,451
143,180(25,582)
124,049

8,149
92,037(27,121)73,06561,037
1,354,717(242,048)
1,173,706

894,428
366,050
17,58824,6491,302,715(139,760)
1,162,955

940,289359,606
17,36913,884
1,331,148(130,219)
1,200,929

8,462,750
3,463,431
166,411233,220
12,325,812(1,322,358)
11,003,454

185,914
55,171
3,752
55,218300,055
2,090,970

185,626
55,34015,07862,183
318,227
2,015,667

1,759,050
522,00835,500522,452
2,839,010
19,783,991¥$

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 23

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 11)
Accrued bonuses
Deferred income taxes (Note 11)
Deposits received (Notes 6, 12)
Other current liabilities
Total current liabilities

2004

¥

205,423
198,242
72,002762
2,706—
181,457
59,639720,2312003¥

292,851
217,862
54,793267
2,732
7
159,330
63,296
791,138

2004$

1,943,637
1,875,693
681,256
7,210
25,603—
1,716,880
564,2826,814,561

Long-term debt due after one year (Note 8)
Guarantee and deposits received (Note 12)
Deferred income taxes (Note 11)
Allowance for employees’ severance and retirement benefits (Note 9)
Directors’ and corporate auditors’ retirement benefits
Other long-term liabilities

644,964
397,460
6,533
4,748
313
936

627,405369,362
—
4,310
287
1,006

6,102,413
3,760,621
61,81344,9242,961
8,856

Minority interests

11,91010,338112,688

122,805
132,744
38,572
294,121
14,420(4,262)(404)
303,875
2,090,970

86,787
96,822
34,693
218,302(4,886)(1,370)(225)
211,8212,015,667

1,161,936
1,255,975
364,954
2,782,865
136,437(40,325)(3,823)2,875,154
19,783,991

Contingent liabilities (Note 17)
Shareholders’ equity (Note 13):
Common stock
Authorized — 780,000 thousand shares
Issued— 476,086 thousand shares (407,086 thousand shares in 2003)
Capital surplus
Retained earnings
Net unrealized holding gains (losses) on securities
Foreign currency translation adjustments
Treasury stock
Total shareholders’ equity¥¥$

Sumitomo Realty & Development Co., Ltd.

23

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 24

CONSOLIDATED STATEMENTS OF INCOME
For the years ended March 31, 2004, 2003 and 2002

Thousands of
U.S. dollars (Note 1)

Millions of yen
2004

Revenue from operations
Costs and expenses:
Cost of revenue from operations
Selling, general and administrative expenses¥

Operating income
Other income (expenses):
Interest expense, net
Dividend income
Loss on sale and devaluation of property and equipment (Note 10)
Loss on devaluation of investments in securities
Loss on sale of investments in securities
Foreign exchange gains
Loss on disposal of property and equipment
Dividend to partnership investors
Other, net
Income before income taxes and minority interest
Income taxes (Note 11):
Current
Deferred
Total
Minority interest
Net income

¥

2003

573,862¥2002

533,915¥497,877

2004$

435,078
42,807
477,885
95,977403,777
41,626445,40388,512

377,199
40,308417,507
80,3704,116,549
405,024
4,521,573
908,099(23,266)705(49,414)
(144)
(286)
142
(539)
(3,889)(3,703)(80,394)
15,583(25,660)
626(48,666)(4,643)
(500)
371
(598)
(3,162)(4,248)(86,480)
2,032(28,200)
526(202)(3,750)—375(478)(2,475)(3,832)(38,036)
42,334(220,134)
6,670(467,537)(1,363)(2,706)
1,344(5,100)(36,796)(35,036)(760,658)
147,441

1,036
6,334
7,370

781
(1,903)(1,122)

4,608
13,10917,717

9,802
59,93069,732

1,893(1,820)1,621

17,911

6,320

¥

4,974

¥

22,996$

Yen

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

24

Sumitomo Realty & Development Co., Ltd.

¥5,429,672

15.34
9.00

¥

59,798

U.S. dollars (Note 1)

12.22
6.00

¥

56.50
6.00

$

0.15
0.09

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 25

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended March 31, 2004, 2003 and 2002
Thousands
Number ofshares ofcommon stock

Commonstock

CapitalsurplusMillions of yen
Net unrealized
holding gains
Retained(losses) on
earnings
securities

Foreigncurrencytranslation
adjustments

Treasurystock

Balance at March 31, 2001
Decrease due to change in consolidated
subsidiaries
Net income
Foreign currency translation adjustments
Net unrealized holding losses on securities
Stock issued under exchange offerings
Treasury stock
Cash dividends paid(¥6 per share)
Bonus to directors

406,810¥ 86,773¥ 96,822¥ 11,673¥ 1,016¥ (2,840)

—
—
—
—
276
—

—
—
—
—
14
—

—
—
—
—
—
—

(45)
22,996
—
—
—
—

—
—
—
(3,175)
—
—

—
—
3,022
—
—
—

—
—
—
—
—
(28)

—
—

—
—

—
—

(2,441)
(18)

—
—

—
—

—
—

Balance at March 31, 2002
Net income
Foreign currency translation adjustments
Net unrealized holding losses on securities
Treasury stock
Increase due to merger
Cash dividends paid(¥6 per share)
Bonus to directors

407,086—————

86,787—————

96,822—————

32,165
4,974
—
—
—
10

(2,159)——(2,727)——182—(1,552)
—
—
—

(30)
—
—
—
(195)
—

—
—

—
—

—
—

(2,442)
(14)

—
—

—
—

—
—

Balance at March 31, 2003
Net income
Foreign currency translation adjustments
Net unrealized holding gains on securities
Issuance of common stock
Treasury stock
Gains on sale of treasury stock
Decrease due to merger of consolidated subsidiaries
Cash dividends paid(¥6 per share)

407,086———
69,000———86,787———36,018———96,822———35,921—
1—

34,693
6,320
—
—
—
—
—
(1)

(4,886)——
19,306————(1,370)—(2,892)
—
—
—
—
—

(225)
—
—
—
—
(179)
—
—

—

—

—

(2,440)———

Balance at March 31, 2004

476,086¥122,805¥132,744¥38,572¥14,420¥(4,262)¥(404)

Thousands of U.S. dollars (Note 1)
Net unrealized
holding gains
Retained(losses) on
earnings
securities¥(2)

Foreigncurrencytranslation
adjustments

Treasurystock

Commonstock

Capitalsurplus

Balance at March 31, 2003
Net income
Foreign currency translation adjustments
Net unrealized holding gains on securities
Issuance of common stock
Treasury stock
Gains on sale of treasury stock
Decrease due to merger of consolidated subsidiaries
Cash dividends paid($0.06 per share)$ 821,147———
340,789———$ 916,094———
339,871—10—$ 328,252
59,798
—
—
—
—
—
(10)

$ (46,229)——
182,666————$ (12,962)—(27,363)—————$ (2,129)————(1,694)————(23,086)———

Balance at March 31, 2004

$1,161,936$1,255,975$364,954$136,437$(40,325)$(3,823)

See accompanying notes.

Sumitomo Realty & Development Co., Ltd.

25

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 26

CONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended March 31, 2004, 2003 and 2002
Thousands of
U.S. dollars (Note 1)

Millions of yen
2004

Cash flows from operating activities:
Income before income tax and minority interest
Depreciation and amortization
Provision for (Reversal of) allowance for doubtful accounts
Increase in employees’ severance and retirement benefits
Loss on sale and devaluation of property and equipment (Note 10)
Loss on disposal of property and equipment
Loss on sale of investments in securities
Loss on devaluation of investments in securities
Interest and dividend income
Interest expense
Increase in securitized properties for sale
Increase in notes and accounts receivable—trade
Increase in inventories
Decrease in trade loans receivable
Increase in notes and accounts payable—trade
Increase (Decrease) in advances received
Other, net
Total

¥

Proceeds from interest and dividend income
Payments for interest(Payments) Receipts for income tax and other taxes
Net cash provided by operating activities

2003

15,583
12,211(2,906)437
49,414
539
286
144
(983)
23,544(16,492)(11,361)(22,032)
7,533
17,224(2,337)(15,312)55,492

¥

2002

2,032
11,973
1,134
567
48,666
598
500
4,643
(956)
25,991(6,065)(4,512)(6,627)
2,031
16,984(294)
10,090106,755¥

2004

42,334
10,731(11,292)
355
202
478
—
3,750
(1,026)28,701(9,112)(859)(7,363)
12,565
7,588
2,823(1,738)78,137$

147,441
115,536(27,496)
4,135
467,537
5,100
2,706
1,363
(9,301)
222,765(156,041)(107,494)(208,459)
71,275
162,967(22,112)(144,877)
525,045963(23,663)
825
33,617

1,326(26,216)(4,334)77,531

858(29,894)(4,974)
44,127

9,112(223,891)
7,806
318,072

Cash flows from investing activities:
Payments for purchases of property and equipment
Proceeds from sale of property and equipment
Payments for purchases of investments in securities
Proceeds from sale of investments in securities
Payments for investments in SPC and partnership
Proceeds from sale of investments / reduce capital in SPC and partnership
Decrease (Increase) in guarantee and lease deposits paid to lessors
Decrease in guarantee and lease deposits received
Receipts of deposits from partnership investors
Restitution of deposits from partnership investors
Other, net
Net cash provided by (used in) investing activities(34,189)
18,095(21,966)768(10,325)8,000(2,845)(10,210)
112,943(76,248)3,469(12,508)(55,616)
14,369(47,489)
22,037(8,015)—59(6,736)
71,790(13,414)(10,634)(33,649)(56,241)
4,264(22,134)925(12,370)24
8,508(1,792)
97,392(5,245)(1,123)
12,208(323,484)
171,208(207,834)
7,267(97,691)
75,693(26,918)(96,603)
1,068,625(721,431)
32,822(118,346)

Cash flows from financing activities:
Decrease in short-term debt
Proceeds from issuance of bonds and notes
Redemption of bonds and notes
Increase (Decrease) 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(87,428)
85,000(114,209)
27,14871,940(6,432)(2,696)44,10017,423(18,606)
126,700(106,444)(49,411)—
11,701(2,671)
2,977(35,754)(6,288)61,258(145,684)
853—
15,938(2,678)14,059(62,542)(827,212)
804,239(1,080,604)
256,864
680,670(60,857)(25,508)
417,258
164,850

Effect of exchange rate changes on cash and cash equivalents(1,763)

8

1,395(16,681)Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Change in cash and cash equivalents due to merger ofconsolidated subsidiaries
Cash and cash equivalents at end of year (Note 3)

36,76995,7038,136
87,567(4,812)
92,379347,895
905,506

See accompanying notes.

26

Sumitomo Realty & Development Co., Ltd.

¥4
132,476¥—
95,703¥—87,567$38
1,253,439

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the years ended March 31, 2004, 2003 and 2002

1. Basis of financial statements
The accompanying consolidated financial statements of Sumitomo Realty &Development Co., Ltd. (the "Company") have been prepared in accordance with theprovisions set forth in 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 toapplication and disclosure requirements of International Financial ReportingStandards.
The accounts of overseas subsidiaries are based on their accounting records
maintained in conformity with generally accepted accounting principles prevailingin 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 ofshareholders’ equity) from the consolidated financial statements of the Company

prepared in accordance with Japanese GAAP and filed with the appropriate Local
Finance Bureau of the Ministry of Finance as required by the Securities andExchange Law. Some supplementary information included in the statutory
Japanese language consolidated financial statements, but not required for fairpresentation, 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, 2004, which was ¥105.69 to U.S. $1. The conveniencetranslations should not be construed as representations that the Japanese yenamounts 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 arecontrolled 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 over which the Company has power ofcontrol 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 ofthe subsidiaries, including the portion attributable to minority shareholders, arerecorded based on the fair value at the time the Company acquired control of therespective subsidiaries.
All significant intercompany balances, transactions and profits have been
eliminated in consolidation.
(2) Foreign currency translation
Receivables and payables denominated in foreign currencies are translated into
Japanese yen at the year-end rates.
Financial statements of consolidated overseas subsidiaries are translated into
Japanese yen at the year-end rate, except that shareholders’ equity accounts aretranslated at historical rates and income statement items resulting fromtransactions with the Company at the rates used by the Company.
Differences arising from translation are presented as "Foreign currencytranslation adjustment" in shareholders’ equity.
(3) Cash and cash equivalents
In preparing the consolidated statements of cash flows, cash on hand, readilyavailable deposits and short-term highly liquid investments with maturity of notexceeding three months at the time of purchase are considered to be cash andcash equivalents.
(4) Recognition of revenue
Revenues from sales of land and residential houses are recognized when units aredelivered and accepted by customers. Revenues from leasing of office space,shops and apartments are recognized as rent accrues over the lease-term.

(6) Securities
Held-to-maturity securities are stated at amortized cost. Investments in
subsidiaries and affiliates which are not consolidated or accounted for using theequity method are stated at moving-average cost. Available-for-sale securities withavailable fair market values are stated at fair market value. Unrealized gains andunrealized losses on these securities are reported, net of applicable income taxes,
as a separate component of shareholders’ equity. Realized gains and losses on saleof such securities are computed using moving-average cost.
Securitized properties for sale are stated at cost which is determined by the
specific identification method and securities with no available fair market value arestated at moving-average cost.
If the market value of held-to-maturity securities, investments in subsidiaries
and affiliates, available-for-sale securities, and securitized properties for saledeclines significantly, such securities are stated at fair market value and thedifference between fair market value and the carrying amount is recognized as loss
in the period of the decline. If the fair market value of investments inunconsolidated subsidiaries and affiliated companies not on 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 these cases, such fair market value or the net asset value
will be the carrying amount of the securities at the beginning of the next year.
(7) Property and equipment
The Company and domestic consolidated subsidiaries depreciate buildings using
the straight-line method, and other property and equipment using the decliningbalance method over estimated useful lives. Overseas consolidated subsidiaries
depreciate property and equipment using primarily the straight-line method in
accordance with the accounting principles in the respective 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(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, the Company
implements cost accounting for matching revenue from sales of consigned
properties and costs associated to such properties.

Sumitomo Realty & Development Co., Ltd.

27

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 28(8) Impairment of fixed assets
On August 9, 2002, "Opinion Concerning Establishment of Accounting Standard for
Impairment of Fixed Assets" was issued by the Business Accounting Deliberation
Council and on October 31, 2003, the Financial Accounting Standard
Implementation Guidance No.6 "Implementation Guidance for the AccountingStandard for Impairment of Fixed Assets" was issued by the Accounting Standards
Board of Japan. The adoption of this standard and guidance is mandatory effectiveat the beginning of the fiscal year beginning after April 1, 2005. Early application ofthis standard and guidance is permitted.
The Company has not adopted early this standard and guidance.
(9) Software cost
Software costs are amortized using the straight-line method over the estimateduseful lives (five years).
(10) Allowance for doubtful account
The Company and its consolidated subsidiaries provide for doubtful accounts at an
estimated uncollectable amount based on the evaluation of certain identified
doubtful and bankrupt receivables plus an amount calculated using the percentageof actual collection losses in certain reference period with respect to remaining
receivables.
(11) Finance leases
Finance leases except those leases for which the ownership of the leased assets is
considered to be transferred to the lessee, are accounted for in the same manneras operating leases.
(12) Income taxes
Income taxes are provided for on the basis of income for financial statement
purposes. The tax effect of temporary differences between the carrying amounts ofassets and liabilities for financial statements and income tax purposes isrecognized as deferred income taxes.
(13) Employees’ severance and retirement benefits
The Company and some of its consolidated subsidiaries provide two types of postemployment benefit plans, lump-sum payment plans and approved retirement
pension plans, under which all eligible employees are entitled to benefits based on
their current rate of pay, length of service, and the conditions under which thetermination occurs.
The liabilities and expenses for severance and retirement benefits are
determined based on the amounts actuarially calculated using certain
assumptions.
The Companies provided allowance for employees’ severance and retirement
benefits at March 31, 2004, 2003 and 2002 based on the estimated amount ofprojected benefit obligation at those dates.
Actuarial gains and losses are recognized in expenses in the succeeding
period.

28

Sumitomo Realty & Development Co., Ltd.

(14) Derivative transaction and hedge accounting
The Company and its consolidated subsidiaries state derivative financial
instruments at fair value and recognize changes in the fair value as gains or losses
unless derivative financial instruments are used for hedging purposes.
If derivative financial instruments are used as hedges and meet certain
hedging criteria, the Companies defer recognition of gains or losses resulting fromchanges in fair value of derivative financial instruments until the related losses orgains on the hedged items are recognized.
However, in cases where forward foreign exchange contracts are used ashedges and meet certain hedging criteria (regarding foreign exchange contracts),
forward foreign exchange contracts and hedged items are accounted for in thefollowing manner:
1. If a forward foreign exchange contract is executed to hedge an existing foreign
currency receivable or payable,(a) the difference, if any, between the Japanese yen amount of 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 theJapanese yen amount of the contract translated using the contracted forward
rate and that translated 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 to hedge a futuretransaction denominated in a foreign currency, the future transaction will berecorded using the contracted forward rate, and no gains or losses on theforward foreign exchange contract are recognized.
Also, if interest rate swap contracts are used as hedge and meet certain
hedging criteria (regarding interest rate swap contracts), the net amount to be paidor received under the interest rate swap contract is added to or deducted from theinterest on the assets or liabilities for which the swap contract was executed.
(15) Amounts per share of common stock
The computation of net income per share is based on the weighted-average
number of shares of common stock outstanding during each year.
Diluted net income per share is not presented, since the Company has neverissued any securities with dilutive effect such as bonds with warrants andconvertible bonds.
Cash dividends per share represent actual amounts applicable to therespective year.
(16) Reclassifications
Certain prior years amounts have been reclassified to conform to the 2004
presentation.
These changes had no impact on previously reported results of operations.

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 29

3. Cash and cash equivalents
Cash and cash equivalents at March 31, 2004 and 2003 consisted of the following:Thousands of
U.S. dollars

Millions of yen

Cash, time and notice deposits
Time deposits over three months
Marketable securities
Cash and cash equivalents

2004

2003

¥132,474—
2¥132,476¥101,700(6,000)3¥ 95,703

2004$1,253,420—
19$1,253,439

4. Inventories
Inventories at March 31, 2004 and 2003, were as follows:

Thousands of
U.S. dollars

Millions of yen

Land and condominiums for saleLand and condominiums projects in progress
Land held for development
Other

2004

2003

¥ 81,658
77,214
26,207
4,468¥189,547¥ 35,584
89,03933,453
3,080¥161,156

2004$ 772,618
730,570
247,961
42,275$1,793,424

5. Investments in and advances to unconsolidated subsidiaries and affiliates
Investments in and advances to unconsolidated subsidiaries and affiliates at March 31, 2004 and 2003, consisted of the following:Thousands of
U.S. dollars

Millions of yen
2004

Investments in common stock, at cost
Advances

2003¥5,948503¥6,451¥5,6732,476¥8,1492004$56,278
4,759$61,037

6. Properties in trust
The Company has properties which are the object of real estate trust contracts.
Such properties included in property and equipment in the consolidated balance sheets at March 31, 2004 and 2003, were as follows:
Thousands of
U.S. dollars

Millions of yen
2004

2003

2004

¥17,655
5,980
62¥23,697¥18,628
6,941
82¥25,651$167,045
56,580587$224,212

Land
Buildings and structures
Machinery and equipment

The Company sold off properties as the object of real estate trust contracts to S.F.Office Network, Ltd. (the "SPC"). However, certain risks and economic values concerning
the properties remain in the Company, because the Company has invested to the SPC exceeding 5% of the transfer countervalue. Therefore, it’s considered that the dealing isfinancial transaction in accordance with the "Practical Guidelines on Accounting of the Trasferor for the Derecognition of Real Estate Securitized by means of Special Purpose
Companies". The properties are included in property and equipment or leasehold rights and other intangible assets, and ¥25,000 million ($236,541 thousand) received from the
SPC is included in deposits received in the consolidated balance sheets.
Such properties at March 31, 2004, were as follows:Land
Buildings and structures
Machinery and equipment
Leasehold rights and other intangible assets

Millions of yen

Thousands of
U.S. dollars

2004

2004

¥29,636
7,147
114
1,713
¥38,610$280,405
67,622
1,079
16,208$365,314

In addition, the SPC has offered the properties as security of ¥25,000 million ($236,541 thousand) loans from banks.

Sumitomo Realty & Development Co., Ltd.

29

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 30

7. Securities
For 2004
A. The following tables summarize acquisition costs, book values and fair market values of securities with available fair market values as of March 31, 2004:(a) Held-to-maturity securities:

Millions of yen

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

Thousands of U.S. dollars

Book value

Fair market value

DifferenceBook value

Fair market value

Difference

¥ 811

¥ 814

¥3

$ 7,673$ 7,702$29

396¥1,207392¥1,206

(4)
¥(1)

3,747
$11,420

3,709$11,411

(38)
$ (9)

(b) Available-for-sale securities:
Millions of yen

Securities whose book value exceeds acquisition cost
Equity securities
OthersSubtotal
Securities whose book value does not exceed acquisition cost
Equity securities
OthersSubtotal
Total

Thousands of U.S. dollars

Acquisition cost

Book value

Difference

Acquisition cost

Book value

Difference¥54,868103
54,971¥80,111
112
80,223¥25,243
925,252$519,141975
520,116$757,981
1,060
759,041$238,840
85
238,925

7,428
754
8,182
¥63,153

6,580
681
7,261
¥87,484

(848)
(73)
(921)
¥24,331

70,281
7,134
77,415$597,531

62,2586,443
68,701$827,742(8,023)(691)(8,714)$230,211

B. The following table summarizes book values of securities with no available fair market values as of March 31, 2004:
Available-for-sale securities:
Book value
Millions of yen

Thousands of
U.S. dollars¥ 3,478
65,290¥68,768$ 32,908
617,750$650,658

Non-listed equity securities
Senior securities
Total
Senior securities included securitized properties for sale amounted to ¥44,473 million ($420,787 thousand).
C. Available-for-sale securities with maturities and held-to-maturity securities at March 31, 2004, mature as follows:

Millions of yen

Bonds
Other
Total

1 year or less

1 to 5 years

5 to 10 years

Over 10 years

¥344
500
¥844

¥863
—
¥863

¥100
—
¥100

¥—
—
¥—

Thousands of U.S. dollars
1 to 5 years
5 to 10 years

Over 10 years

1 year or less

Bonds
Other
Total

$3,255
4,731$7,986$8,165—$8,165

$946
—
$946

$—
—
$—

D. Total sales of available-for-sale securities sold in the year ended March 31, 2004 amounted to ¥220 million ($2,082 thousand) and the related gains and losses amounted
to ¥11 million ($104 thousand) and ¥237 million ($2,242 thousand), respectively.
E. The securitized properties for sale are the equity investments such as preferred subscription certificates and silent partnership ("Tokumei Kumiai") investments in Special
Purpose Companies (SPC) and Tokumei Kumiai which own and develop real estate. The Company or its subsidiaries will sell real estate in SPC and Tokumei Kumiai after
the completion of the construction. Tokumei Kumiai can be used as a vehicle for investment allowed under the Japanese Commercial Code.
As of March 31, 2004, securitized properties for sale consisted of the preferred subscription certificates issued by SPC.

30

Sumitomo Realty & Development Co., Ltd.

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 31

For 2003
A. The following tables summarize acquisition costs, book values and fair market values of securities with available fair market values as of March 31, 2003:(a) Held-to-maturity securities:
Millions of yen

Book value

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

Fair market value

Difference¥1,095¥1,103¥8

117¥1,212

117¥1,220—¥8(b) Available-for-sale securities:

Millions of yen
Acquisition cost

Book value

Difference¥ 9,284
1
9,285¥10,884
1
10,885¥ 1,600—
1,600

39,447857
40,304¥49,589

29,954697
30,651¥41,536(9,493)(160)(9,653)¥(8,053)

Securities whose book value exceeds acquisition cost
Equity securities
OthersSubtotal
Securities whose book value does not exceed acquisition cost
Equity securities
OthersSubtotal
Total

Investments in securities were devaluated and the loss amounted to ¥4,196 million, consisted of equity securities included available-for-sale securities.
B. The following table summarizes book values of securities with no available fair market values as of March 31, 2003:
Available-for-sale securities:

Book value
Millions of yen

MMF
Non-listed equity securities
Senior securities
Total

¥

3
3,270
42,298¥45,571

Senior securities included securitized properties for sale amounted to ¥27,980.
C. Available-for-sale securities with maturities and held-to-maturity securities at March 31, 2003, mature as follows:
Millions of yen

Bonds
Other
Total

1 year or less

1 to 5 years

5 to 10 years

Over 10 years

¥529
—
¥529

¥ 683
600
¥1,283

¥600
—
¥600

¥—
—
¥—

D. Total sales of available-for-sale securities sold in the year ended March 31, 2003 amounted to ¥644 million and the related losses amounted to ¥500 million.
E. The securitized properties for sale are the equity investments such as preferred subscription certificates and silent partnership ("Tokumei Kumiai") investments in Special
Purpose Companies (SPC) and Tokumei Kumiai which own and develop real estate. The Company or its subsidiaries will sell real estate in SPC and Tokumei Kumiai after
the completion of the construction. Tokumei Kumiai can be used as a vehicle for investment allowed under the Japanese Commercial Code.
As of March 31, 2003, securitized properties for sale consisted of the preferred subscription certificates issued by SPC.

8. Short-term debt and long-term debt
Short-term debt at March 31, 2004 and 2003 consisted of the following:
Millions of yen
2004

Loans, principally from banks
Commercial paper¥171,423
34,000¥205,423

Averageinterest rate (%)

0.90
0.16

Thousands of U.S. dollars
2003¥228,751
64,100¥292,851

Averageinterest rate (%)

0.96
0.82

2004

$1,621,942
321,695$1,943,637

The interest rates represent weighted average rates in effect at March 31, 2004 and 2003, regardless of borrowing currencies, though the range of the interest rate varies
by borrowing currency.

Sumitomo Realty & Development Co., Ltd.

31

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 32

Long-term debt at March 31, 2004 and 2003, consisted of the following:Thousands of
U.S. dollars

Millions of yen

2.65% Euroyen notes(*), due 2004
2.575% Euroyen notes, due 2004
2.5% domestic straight bonds, due 2003
2.6% Euroyen notes, due 2003
2.75% domestic straight bonds, due 2003
3.0% domestic straight bonds, due 2004
2.6% domestic straight bonds, due 2003
3.1% Euroyen notes, due 2005
3.0% domestic straight bonds, due 2003
3.0% domestic straight bonds, due 2003
2.65% domestic straight bonds, due 2003
2.95% domestic straight bonds, due 2004
2.35% domestic straight bonds, due 2003
2.45% domestic straight bonds, due 2004
2.45% domestic straight bonds, due 2004
2.62% domestic straight bonds, due 2005
2.3% domestic straight bonds, due 2004
2.85% domestic straight bonds, due 2006
Floating rate domestic straight bonds, due 2006
1.6% domestic straight bonds, due 2006
Floating rate domestic straight bonds, due 2006
Floating rate domestic straight bonds, due 2007
1.5% domestic straight bonds, due 2006
Floating rate domestic straight bonds, due 2006
1.75% domestic straight bonds, due 2005
1.85% domestic straight bonds, due 2006
1.85% domestic straight bonds, due 2006
1.85% domestic straight bonds, due 2006
2.0% domestic straight bonds, due 2007
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
0.8%—1.2% Euroyen notes, due 2005 (**)
1.35% domestic straight bonds, due 2006
1.5% domestic straight bonds, due 2007
1.5% domestic straight bonds, due 2007
1.39% domestic straight bonds, due 2006
1.4% domestic straight bonds, due 2007
1.4% domestic straight bonds, due 2007
1.68% domestic straight bonds, due 2008
1.49% domestic straight bonds, due 2006
1.92% domestic straight bonds, due 2008
0.75%—0.96% Euroyen notes, due 2004
Loans, principally from banks and insurance companies,
interest principally at rates of 0.51% to 4.50% in 2004, and 0.82% to 4.35% in 2003:
Unsecured
Subtotal
Amount due within one year
Total(*) Euroyen notes = yen denominated bonds issued in Euro market(**) This bond was called by the Company before its maturity.

32

Sumitomo Realty & Development Co., Ltd.

2004

2003

¥

—
7,400
—
—
—
3,200
—
700
—
—
—
34,422—
19,6009,321
15,366
3,580
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
12,500—5,000
10,00010,0007,000
20,00010,00010,000
5,000
5,000
—

¥ 9,300
7,400
13,000
1,000
5,000
3,200
7,100
700
9,400
33,481
9,669
34,441
9,497
19,6009,321
15,566
3,580
3,300
7,606
9,500
7,844
7,730
7,360
7,592
10,000
7,808
9,685
9,407
9,406
7,147
12,00010,00010,00010,00012,500
5,000
5,000
—
—
—
—
—
—
—
—
1,700

$

2004

510,575
843,206(198,242)¥644,964

483,427
845,267(217,862)¥627,405

4,830,873
7,978,106(1,875,693)$6,102,413—
70,016———30,277
—
6,623
—
—
—
325,688—
185,448
88,192
145,388
33,87329,331
69,922
89,886
74,21771,057
69,63869,42094,616
71,502
89,02588,722
85,694
67,622
113,540
94,616
94,616
94,181
118,270—
47,30894,616
94,616
66,232
189,233
94,616
94,61647,30847,308—

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 33

The aggregate annual maturities of long-term debt at March 31, 2004, are as follows:Year ending March 31

Millions of yen

2005
2006
2007
2008
2009
2010 and thereafter
Total¥198,242
222,442
193,264
132,403
76,644
20,211¥843,206

Thousands of
U.S. dollars$1,875,693
2,104,665
1,828,593
1,252,749
725,177
191,229$7,978,106

As is customary in Japan, security must be given if requested by lending banks under certain circumstances, and generally banks have the right to offset cash deposited
with them against any debt or obligations payable to the bank that becomes due in case default and certain other specified events. The Company has never received such
request.

9. Employees’ severance and retirement benefits
As explained in Note 2(13), the liabilities and expenses for severance andretirement benefits are determined based on the amounts obtained by actuarial
calculations.

The allowance for severance and retirement benefits included in the liability
section of the consolidated balance sheets as of March 31, 2004 and 2003
consisted of the following:Thousands of
U.S. dollars

Millions of yen

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

2004

2003

2004

¥ 7,286(2,422)(117)
1¥ 4,748¥ 6,720(2,059)(351)—¥ 4,310$ 68,937(22,916)(1,107)10$ 44,924

Included in the consolidated statements of operations for the years ended March 31, 2004 and 2003 are severance and retirement benefit expenses comprised of thefollowing:Thousands of
U.S. dollars

Millions of yen
2004

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 years
ended March 31, 2004 and 2003 used by the Company are 2.0% and 2.5%,
respectively (the discount rates used by one consolidated subsidiary are 1.5%). The
estimated amount of all retirement benefits to be paid at the future retirement date

¥463
138
(50)
351
¥902

2003

2004

¥450
141
(51)
431
¥971

$4,381
1,305
(473)
3,321
$8,534is allocated equally to each service year using the estimated number of total
service years. Actuarial gains and losses are recognized in income statement in thenext year.

10. Loss on sale and devaluation of property and equipment
As explained in Note 2(8), the new accounting standard for impairment of fixed
assets is required to be adopted in periods beginning on or after April 1, 2005. Inorder to prepare for the adoption of the standard, the Company and its subsidiaries
sold and recognized losses on a part of fixed assets of ¥49,414 million ($467,537
thousand). Some of the fixed assets were sold to its consolidated subsidiaries andsuch losses incurred in these transactions were not eliminated in consolidation andwere recorded as net loss on devaluation of land or buildings. Loss on sale anddevaluation of property and equipment of ¥49,414 million ($467,537 thousand)consists of net loss on sale of land of ¥22,508 million ($212,963 thousand), loss ondevaluation of land of ¥20,413 million ($193,140 thousand), net loss of sale ofbuildings of ¥6,339 million ($59,977 thousand) and loss on devaluation of buildingsof ¥154 million ($1,457 thousand).

Sumitomo Realty & Development Co., Ltd.

33

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 34

11. Income taxes
The normal effective statutory income tax rate in Japan arising out of aggregationof corporate, enterprise and inhabitants taxes was approximately 42.05% for theyears ended March 31, 2004 and 2003.

The following table summarizes the significant differences between thestatutory tax rate and the Company’s effective tax rate for financial statement
purposes for the years ended March 31, 2004 and 2003.

Statutory tax rate
Net operating loss carryforwards of subsidiaries
Per capita inhabitant taxes
Entertainment expenses and others not deductible for tax purposes
Valuation allowance for deferred tax assets of certain subsidiaries
Effect of tax rate changes
Difference of tax rates of foreign subsidiaries
Effect of taxation on dividends
Tax benefits on losses of subsidiaries
Realized foreign currency translation adjustments due to liquidations of subsidiaries
Unrealized gains
Other
Effective tax rate

2004

2003

42.05%
2.31
1.50
0.90
—
—
—
—
—
—
—
0.54
47.30%

42.05%(39.11)——(58.42)
19.54(7.53)
37.27(68.90)(7.49)
29.44(2.05)(55.20)%Details of deferred tax assets and liabilities at March 31, 2004 and 2003 were as follows:
Thousands of
U.S. dollars

Millions of yen

Deferred tax assets:
Net operating loss carryforwards
Loss from devaluation of inventories
Allowance for employees’ severance and retirement benefits
Unrealized inter-company profits
Accrued bonuses
Net unrealized holding losses on securities
Other
Subtotal of deferred tax assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Net unrealized holding gains on securities
Other
Total deferred tax liabilities
Net deferred tax assets
The aggregate statutory income tax rate will be reduced for the years
commencing on April 1, 2004 or later due to the revised local tax law. At March
31, 2004 and 2003, the Company and consolidated domestic subsidiaries applied

34

Sumitomo Realty & Development Co., Ltd.

2004

2003

2004

¥ 15,722
5,094
1,845
1,525
1,219
—
4,875
30,280(10,497)
19,783¥ 23,133
5,758
—
1,564
—
3,146
7,866
41,467(12,028)
29,439$148,756
48,197
17,457
14,42911,534—
46,125
286,498(99,318)
187,180(9,962)
(—)

(—)
(7)

(94,257)(—)(9,962)(7)(94,257)¥ 9,821¥ 29,432$ 92,923

the reduced aggregate statutory income tax rate of 40.69% for calculating deferred
tax assets and liabilities that are expected to be recovered or settled in the years
commencing on April 1, 2004 or later.

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 35

12. Guarantee and deposits received
Guarantee and deposits received at March 31, 2004 and 2003, were as follows:
Millions of yen
2004

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

Averageinterest rate (%)

Thousands of U.S. dollars
Averageinterest rate (%)

2003

2004

¥131,015
50,442
181,457—
0.25¥153,166
6,164
159,330—
0.98$1,239,616
477,264
1,716,880¥145,857
22,500—2.80¥156,098
22,500—2.80$1,380,045
212,887

203,103
26,000397,460¥578,917—
0.79

164,764
26,000369,362¥528,692—
0.86

1,921,687
246,0023,760,621$5,477,501

As explained in Note 6, ¥25,000 million ($236,541 thousand) received from the SPC related to the sale of properties is included in deposits received.
The aggregate annual maturities of interest-bearing guarantee and deposits received at March 31, 2004, are as follows:Year ending March 31

Millions of yen

2005
2006
2007
2008
2009
2010 and thereafter¥72,942—
20,0006,000——¥98,942

Thousands of
U.S. dollars$690,151—
189,232
56,770——$936,153

13. Shareholders’ equity
Under the Commercial Code of Japan, the entire amount of the issue price ofshares is required to be accounted for as capital, although a company may, byresolution of its Board of Directors, account for an amount not exceeding one-halfof the issue price of the new shares as additional paid-in capital, which is included
in capital surplus.
The Commercial Code provides that an amount equal to at least 10% of cash
dividends and other cash appropriations shall be appropriated and set aside as alegal earnings reserve until the total amount of legal earnings reserve andadditional paid-in capital equals 25% of common stock. The total amount of legal
earnings reserve and additional paid-in capital of the Company has reached 25% ofcommon stock, and therefore the Company is not required to provide legal earnings
reserve any more. The legal earnings reserve and additional paid-in capital may be
used to eliminate or reduce a deficit by resolution of the shareholders’ meeting or
may be capitalized by resolution of the Board of Directors. On condition that the

total amount of legal earnings reserve and additional paid-in capital remains equal
to or exceeds 25% of common stock, they are available for distribution by the
resolution of shareholders’ meeting. Legal earnings reserve is included in retained
earnings in the accompanying financial statements.
The maximum amount that the Company can distribute as dividends is
calculated based on the non-consolidated financial statements of the Company inaccordance with the Commercial Code.
Effective April 1, 2002, the Company adopted the new accounting standard fortreasury stock and reversal of statutory reserves (Accounting Standards Board
Statement No. 1, "Accounting Standard for Treasury Stock and Reversal of
Statutory Reserves"). The effect on net income of the adoption of the new
accounting standard was not material.

14. Information for certain lease transactions
Finance leases which do not transfer ownership to lessees are not capitalized and accounted for in the same manner as operating leases. Certain information for such noncapitalized finance leases is as follows.
As Lessee
A summary of assumed amounts (inclusive of interest) of acquisition cost, accumulated depreciation and net book value at March 31, 2004 and 2003 is as follows:
Thousands of
U.S. dollars

Millions of yen
2004

2003

2004

Acquisition cost:
Buildings and structures¥15,300¥13,913$144,763
Other
1,871
1,991
17,703
Accumulated depreciation(5,079)(3,338)(48,056)
Net book value¥12,092¥12,566$114,410
Depreciation equivalent of ¥2,477 million ($23,436 thousand) and ¥1,784 million for 2004 and 2003, respectively, are computed using the straight-line method over thelease terms assuming no residual value or residual indemnity.

Sumitomo Realty & Development Co., Ltd.

35

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 36

Lease expenses under finance leases, inclusive of interest, for the years ended March 31, 2004 and 2003, amounted to ¥2,477 million ($23,436 thousand) and ¥1,784
million, respectively.
Future lease payments and receipts under such finance leases and non-cancelable operating leases at March 31, 2004 and 2003, were as follows:
Thousands of
U.S. dollars

Millions of yen
2004

2003

2004

¥ 2,268
9,824¥12,092¥ 2,312
10,254¥12,566$ 21,459
92,951$114,410

Future sub-lease payments:
Due within one year
Due after one year
Total

¥—
—
¥—

¥1
—
¥1

$—
—
$—

Future sub-lease receipts:
Due within one year
Due after one year
Total

¥7
—
¥7

¥18
7
¥25

$66
—
$66

Operating leases
Future lease payments:
Due within one year
Due after one year
Total

¥ 14,447
142,679¥157,126¥ 10,215
116,388¥126,603$ 136,692
1,349,977$1,486,669

Future lease receipts:
Due within one year
Due after one year
Total

¥112
576
¥688

¥ 82
685
¥767

$1,0605,450$6,510Finance leases
Future lease payments:
Due within one year
Due after one year
Total

15. Derivative transactions
The Company and its subsidiaries utilize financial derivative transactions only forthe purpose of hedging the currency risk associated with foreign currency
denominated transactions or hedging the interest rate risk associated with theCompany’s 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 rate changes. The derivative financial instruments are
executed with creditworthy 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 in the conference whose chairman isthe director of finance department. The Finance Department prepares reports onderivative transactions and informs them to the director of Finance Department
periodically.
The following summarizes hedging derivative financial instruments used by
the Companies and items hedged:

Hedging instruments:
Foreign exchange forward contracts
and cross currency swap contracts
Interest rate swap contracts

Hedged items:
Foreign currency monetary liabilities
and foreign provisional transaction
Bank loans, bonds and deposits

The Companies evaluate hedge effectiveness by comparing the cumulativechanges in cash flows from or the changes in fair value of hedged items and thecorresponding changes in the hedging derivative instruments.
Evaluating hedge effectiveness of interest rate swap at years ended March
31, 2004 and 2003 is omitted as special hedge accounting has been applied toderivative transactions of interest rate swap contracts. Also, evaluating hedge
effectiveness of foreign exchange forward at years ended March 31, 2004 and2003 is omitted because significant terms of hedging instruments and those of thehedged items are the same and the risk of changes in foreign exchange rates
would be entirely eliminated.
The contract amounts and unrealized gains or losses of outstanding derivativetransactions at March 31, 2004 and 2003 were not disclosed because all derivativetransactions were used as hedges and hedge accounting was applied.

16. Segment information
The Company and its consolidated subsidiaries mainly operate their business in five segments: leasing of buildings and apartments, other properties; sale of condominiums;
construction of housing and buildings; brokerage business; and other business.

36

Sumitomo Realty & Development Co., Ltd.

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 37

Information by industry segment for the years ended March 31, 2004, 2003 and 2002 is summarized as follows:
Millions of yen

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

Leasingbusiness¥¥

201,307
1,469
202,776
150,119
52,657

Sales
business¥ 213,285
18
213,303
181,023¥ 32,280

II Identifiable assets, depreciation expense and capital expenditures
Identifiable assets¥ 1,481,757¥ 261,679
Depreciation expense
11,211
93
Capital expenditures
33,470473

Construction
business¥¥¥

Brokeragebusiness

Otherbusiness

112,819
12,267125,086
116,875
8,211¥ 39,529
280
39,80931,271¥ 8,538

26,024165
165¥ 17,694
291
356

¥

¥

¥

6,922
4,006
10,928
10,526402

91,216
91
90

Total

¥

¥

¥

573,862
18,040591,902489,814102,0881,878,370
11,851
34,554

Elimination
and/or corporate

¥

¥

¥

Consolidated— ¥(18,040)(18,040)(11,929)(6,111) ¥573,862—
573,862
477,885
95,977

212,600360
312

2,090,970
12,211
34,866¥

Millions of yen

For 2003
I Net sales and operating income
Net sales
Customers
Intersegment
Total
Costs and expenses
Operating income

Leasingbusiness¥¥

191,215
1,764
192,979
139,718
53,261

Sales
business¥ 183,729
16
183,745
157,958¥ 25,787

II Identifiable assets, depreciation expense and capital expenditures
Identifiable assets¥ 1,517,653¥ 211,066
Depreciation expense
11,11494
Capital expenditures
47,596359

Construction
business¥¥¥

Brokeragebusiness

Otherbusiness

114,206
10,258124,464
117,472
6,992¥ 37,335
242
37,57729,785¥ 7,792

21,436158
451¥ 34,452
248
259

¥

¥

¥

7,430
3,862
11,292
10,621
671

106,621
80
174

Total

¥

¥

¥

533,915
16,142550,057
455,554
94,503

1,891,228
11,694
48,839Elimination
and/or corporate

¥

¥

¥

Consolidated— ¥(16,142)(16,142)(10,151)(5,991) ¥533,915—533,915445,40388,512

124,439279
805

2,015,667
11,97349,644¥

Millions of yen

For 2002
I Net sales and operating income
Net sales
Customers
Intersegment
Total
Costs and expenses
Operating income

Leasingbusiness¥¥

176,244
1,790
178,034
128,80949,225

Sales
business¥ 170,428—
170,428
146,040¥ 24,388

II Identifiable assets, depreciation expense and capital expenditures
Identifiable assets¥ 1,506,120¥ 193,374
Depreciation expense
9,942
99
Capital expenditures
63,839414

Construction
business¥¥¥

Brokeragebusiness

108,336
6,993
115,329
110,557
4,772¥ 35,966
218
36,18428,231¥ 7,953

20,299176
211¥ 21,044
212
274

Other
business

¥

¥

¥

6,903
3,494
10,397
10,38413

110,412
71
71

Total

¥

¥

¥

497,877
12,495510,372
424,02186,351

1,851,249
10,50064,809Elimination
and/or corporate

¥

¥

¥

Consolidated— ¥(12,495)(12,495)(6,514)(5,981) ¥497,877—
497,877
417,507
80,370

121,486
231
654

1,972,735
10,731
65,463¥Thousands of U.S. dollars

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

Leasingbusiness

Salesbusiness

Construction
business

Brokeragebusiness

1,904,693
13,8991,918,592
1,420,371
498,221$ 2,018,025
170
2,018,195
1,712,773$ 305,422$ 1,067,452
116,066
1,183,518
1,105,828$ 77,690$ 374,009
2,649
376,658
295,875$ 80,783$$$ 167,414
2,753
3,368

$

II Identifiable assets, depreciation expense and capital expenditures
Identifiable assets$ 14,019,841$ 2,475,911
Depreciation expense
106,075880
Capital expenditures
316,681
4,476

246,230
1,561
1,561

Other
business$

Total

65,49337,903103,396
99,593
3,803$

5,429,672
170,6875,600,359
4,634,440
965,919$

863,052861
852$ 17,772,448
112,130
326,938

Elimination
and/or corporate$

Consolidated— $(170,687)(170,687)(112,867)$ (57,820) $$ 2,011,543
3,406
2,952

5,429,672—
5,429,672
4,521,573
908,099$ 19,783,991
115,536
329,890

Distribution from SPC and partnership which operate real estate leasing business is included in net sales of "Leasing business ".
Sumitomo Realty & Development Co., Ltd.

37

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 38

17. Contingent liabilities
At March 31, 2004, the Company and its consolidated subsidiaries were
contingently liable as guarantors of borrowings by customers and others amounted
to ¥278 million ($2,630 thousand).
Also, at March 31, 2004, the Company and its consolidated subsidiaries hadoutstanding commitments to guarantee loans of customers and others amounted to¥10 million ($95 thousand).
(Lawsuits)
The Company was a defendant in the following lawsuits, in which, based on the
Leased Land and House Lease Law, the Company claimed the reduction of therental payments.
Two lawsuits are pending in court.
A lawsuit was brought in the Tokyo District Court against the Company in1994 (Case A) and another one in 1995 (Case B), relating to claims to recover thedifference between the rental payments based on the lease agreements and theamounts the Company paid taking a position under Leased Land and House Lease
Law. While the District Court issued judgments against the Company in August andOctober of 1998, the Company appealed to the Tokyo Higher Court in September
and November of 1998 as the Company believed that the judgments were
contradictory to the previous legal interpretations.
In case B, the Tokyo Higher Court issued judgment for the Company in Octoberof 1999. And the lessor appealed to the Supreme Court in November of 1999.
In case A, the Tokyo Higher Court issued judgment against the Company inJanuary of 2000 that, the Company believed, was contradictory to the previous
legal interpretations. So the Company appealed to the Supreme Court in January of2000.
In October of 2003, the Supreme Court reversed the judgments and remandedboth cases to the Tokyo Higher Court.

18. Subsequent events
The Company issued 1.31% ¥20,000 million ($189,233 thousand) domestic straightbonds due 2009 on April 30, 2004, 1.52% ¥20,000 million ($189,233 thousand)domestic straight bonds due 2010 on June 15, 2004.

38

Sumitomo Realty & Development Co., Ltd.

On June 29, 2004, the shareholders of the Company approved payments of ayear-end cash dividend of ¥9 ($0.09) per share or a total ¥4,280 million ($40,496
thousand) to shareholders of record at March 31, 2004.

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 39

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, 2004
and 2003, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2004,
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 plan and perform the audit to obtainreasonable 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 bymanagement, 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, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three
years in the period ended March 31, 2004, in conformity with accounting principles generally accepted in Japan.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2004 are presented 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, 2004

Sumitomo Realty & Development Co., Ltd.

39

住友不動産AR04-財務(0816) 04.9.6 9:23 AM ページ 40

BOARD OF DIRECTORS AND AUDITORSCORPORATE DATA

(As of June 29, 2004)(As of March 31, 2004)

Chairman of the Board *Shinichiro Takagi

Sumitomo Realty & Development Co., Ltd.

President & Chief Executive Officer *Junji Takashima
Director & Advisor *Taro Ando
Directors & Senior Managing Executive Officers
Hisao Matsui *Tetsuro Tsuruta *Masayoshi Ohashi *Kenichiro Sugimoto
Kazuo Masuoka
Kenichi Onodera
Senior Executive Officers
Sadao Ushimaru
Shozo Suzuki
Haruo Fukumuro
Kenichi Kameyama
Tsutomu Oyama
Hiroyuki Asano
Yoshifumi Nakamura
Executive Officers
Takahiro Daisaka
Satoru Miyashita
Akira Murakami
Yoshiteru Nishimoto
Naoyoshi Matsugami
Takashi Saito
Masayuki Takahashi
Masaki Ogawa
Yoshiya Unno
Yoshinobu Sakamoto
Nobuaki Takemura
Koji Ito
Toshikazu Tanaka
Masato Kobayashi
Kojun Nishima
Statutory Auditor
Shinsaku Sanmoto
Standing Statutory Auditors
Ryoichi Nomura
Chuji Kitamura
Kunio Kobayashi(*) Representative Director

40

Sumitomo Realty & Development Co., Ltd.

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
http://www.sumitomo-rd.co.jp
Date of Establishment
December 1, 1949
Paid-in Capital¥122,805 million
Common Stock Issued and Outstanding
476,085,978
Number of Shareholders
30,948
Number of Employees
6,937
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.
Shintoshin Real Estate Co., Ltd.
Universal Home Inc.
Stock Exchange Listings
Tokyo and OsakaH2-H3-色味2 04.9.10 1:57 PM ページ 41

SHARE PRICE AND TRADING VOLUME ON TOKYO STOCK EXCHANGE¥1,5001,800¥1,2501,600

TOPIX average (right scale)¥1,000

1,400

¥750

1,200

Share price (left scale)

¥500

1,000

¥250

800

¥0

600

200
180
160
140
120
100
80
60

Trading volume (millions of shares)

40
20

1997

1998

1999

2000

2001

2002

2003

APR

JAN

OCT

JUL

APR

JAN

OCT

JUL

APR

JAN

OCT

JUL

APR

JAN

OCT

JUL

APR

JAN

OCT

JUL

APR

JAN

OCT

JUL

APR

JAN

OCT

JUL

APR

JAN

0

2004

* Simple average of monthly highs and lows.

Sumitomo Realty & Development Co., Ltd.

41

住友不動産04AR̲表1-4 04.9.6 9:35 AM ページ 1

SUMITOMO REALTY & DEVELOPMENT CO., LTD. 2004 ANNUAL REPORT

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