2003 ANNUAL REPORT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, home remodelingFive-Year Financial Highlights............................................................................................ 1
To Our Shareholders........................................................................................................... 2
Our History.......................................................................................................................... 4
Sumitomo Realty & Development Group ........................................................................... 4
Outline of Operations ........................................................................................................ 5
Financial Section .............................................................................................................. 13
Board of Directors and Auditors....................................................................................... 36
Corporate Data ................................................................................................................. 36
Share Price and Trading Volume on Tokyo Stock Exchange ............................................ 37

quality of life, the Company is poised to begin a new phase of growth in
the 21st century.

CB
Brokerage: Brokerage of residential homes and income producing properties.

Contents

comfortable working and living environments that contribute to a higher

Construction: Custom Home construction and home remodeling.

Sales: Condominium development and sales.

Leasing: Commercial Buildings development and leasing.

LSand building management services. While continuing to create

Cautionary Statements with Respect to Forward-Looking Statements
Statements made in this annual report with respect to plans, targets and future performance that are nothistorical fact are forward-looking statements. These statements are based on management’s assumptions
and beliefs in light of 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 theforward-looking statements. Such factors include but are not limited to macroeconomic conditions, supply anddemand in the real estate market and interest rate trends.

Five-Year Financial Highlights
Years ended March 31

Thousands of
U.S. dollars

Millions of yen
2003

2002

2001

2000

1999

2003

¥ 533,915¥ 497,877¥ 459,245¥ 421,587¥ 389,136$ 4,441,889

Revenue from leasing business

191,215

176,244

163,047

151,268

150,976

1,590,807

Revenue from sales business

183,729

170,428

149,196

150,483

137,735

1,528,528

Revenue from construction business

114,206

108,336

104,549

80,064

61,191

950,133

Revenue from brokerage business

37,33535,966

34,702

31,63327,829310,607

Consolidated:
Revenue from operations

7,430

6,903

7,751

8,139

11,40561,814

Operating profit

Revenue from other business

88,51280,37075,21870,54856,516736,373

Ordinary profit

56,76047,14238,50927,06921,688472,134

Net income (loss)

4,974

22,996(18,008)

14,737

10,98341,381

Total assets

2,015,667

1,972,735

1,903,529

1,916,343

1,827,146

16,769,276

Total shareholders’ equity

211,821

213,767

193,442

211,140

198,498

1,762,237

Yen

U.S. dollars

Per share:
Net income (loss)¥

Shareholders’ equity
Dividend

12.22

¥

56.50

¥

(44.27)

¥

36.23

¥

27.00

$

0.10

520.84525.17475.51519.01487.94

4.33

6.00

6.00

6.00

6.00

6.00

0.05

Note: The 2003 yen amounts have been translated into U.S. dollars, for convenience only, at the rate of ¥120.20 = U.S.$1, the approximate exchange rate on March 31, 2003.

Revenue from Operations (Billions of yen)

Operating Profit (Billions of yen)

Ordinary Profit (Billions of yen)
89

534

75

57

80
47

71

498

39

57

459
422

27

389

1999

22

2000

2001

2002

2003

Net Income (Loss) (Billions of yen)

1999

2000

2001

2002

2003

Total Assets (Billions of yen)

2000

2001

2002

2003

Total Shareholders’ Equity (Billions of yen)

23
1,973
15

1999

1,916

1,904

2000

2001

2,016

211
198

214

212

2002

2003

193

1,827

11
5

1999

2000

(18)
2001

2002

2003

1999

2002

2003

1999

2000

2001

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

1

To Our Shareholders

Junji Takashima, President

F

iscal 2003 (ended March 31, 2003) was anotheryear of solid growth for Sumitomo Realty.
Building on our previous successes, we

continued to push revenues and earnings to
new heights, while at the same time pressing
ahead with realistic and aggressive measuresnecessary to improve our financial position andensure future growth.
The strategic framework for this action isoutlined in the New Three-Year Plan, which willend in fiscal 2004. This plan is the successor to theFive-Year Business Reconstruction Plan, begun infiscal 1998, which was formulated to counter thebusiness difficulties that arose as a result of thecollapse of the bubble economy. The goals of thisplan were achieved a year ahead of schedule,
following record ordinary profit in fiscal 2001 thatexceeded the historical highs of 1991. The aim of
the New Three-Year Plan is to build on that
achievement further.
The principal focus of the New Three-Year Plan
is to consistently raise revenue from operations,operating and ordinary profit to higher levels eachyear, achieving landmark increases and markedly
enhancing earning capacity. To achieve these goals
while continuing to respond to changes in thebusiness environment, we are concentrating on
developing our four business areas, each of whichhave different profit structures and incur different
operating risks, and creating a favorable balanceamong them. These four core businesses are
Leasing, Sales, Brokerage and the newest addition
Construction, which has grown to become one of
the key components of the Company.

2

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

Another Year of Record Earnings

During fiscal 2003, the second year of our New
Three-Year Plan, all four of our corebusinesses achieved growth in revenues.

Consolidated revenue from operations was¥534 billion, operating profit was ¥89 billion, andordinary profit was ¥57 billion. All of these totals
set new records. Due to our accelerated response

As we enter the final year of the New ThreeYear Plan, although Japan's deflationary economy
has persisted longer than was assumed when theplan was formulated, the fundamentals of each of
our core businesses have been steadilystrengthened, and earnings and income have risen
for each of the six fiscal years from fiscal 1998
through the year under review. We expect a repeatof this performance in fiscal 2004.

to the adoption of impairment accounting, however,net income was ¥5 billion.

Comparison of fiscal 1997 results (the period prior to the launch of the Five-Year Business
Reconstruction Plan) with forecasts for fiscal 2004
Fiscal 1997
Revenue from Operations
Operating Profit
Ordinary Profit

Fiscal 2004
(forecast)

7yearsIncrease¥339 billion¥43 billion¥3 billion¥580 billion¥95 billion¥65 billion

+71%
+121%
+2,067%

Fiscal 1997

Fiscal 2004
(forecast)

7yearsIncrease¥200 billion¥218 billion¥128 billion¥39 billion

+46%
+113%
+116%
+21%

Revenue from Operations by segment

Leasing
Sales
Construction
Brokerage¥137 billion¥102 billion¥59 billion¥32 billion

Adoption of Impairment Accounting

Under the Five-Year Business Reconstruction
Plan, the Company focused on addressing thenumerous discrepancies in its balance sheets.

Construction was started on land scheduled
for commercial development with book value ofmore than ¥500 billion, lowering land holdings onwhich construction had not begun to a reasonablelevel of approximately ¥100 billion. By writing off
debt and renewing collection efforts, outstandingbalances at our finance subsidiary, which
previously had a lending balance of ¥330 billion,
and overseas operations, which had an investment
balance of more than ¥170 billion, were eachreduced to slightly over ¥10 billion. Measures werealso implemented to deal with losses incurred as aresult of the excesses of the bubble years, such as
the recording of lump sum loss cuts on land for
condominium development, as well as on
adjustment of prior years’ rent in the subleasing
business. In total, the Company recorded
extraordinary losses of more than ¥200 billion.
The Company has also adopted control as its
standard for consolidation, and has made a
succession of changes to its accounting standards,
such as fair market value accounting for financial
instruments and actuarial methods of measuring
retirement benefit obligations.
The next issue we face is the adoption of
impairment accounting for leasing properties andother fixed assets, which will become compulsory
from fiscal 2006. Our intention is to begin taking
steps to bring our accounts in line with thisstandard before it becomes compulsory, as we havedone with other accounting changes. Accordingly,

losses for assets deemed to be applicable toimpairment accounting are being recorded over areview. We aim to further reduce this by nearly¥100 billion, to ¥1,050 billion, by the end of fiscal

two-year period, during fiscal 2003 and 2004.
Although final decisions on the specificmethods of impairment accounting have not beenannounced, it has been decided that impairment isnecessary when an asset’s undiscounted future

2004, the final year of the New Three-Year Plan.
One of the more influential measures we areconsidering to reduce liabilities and improve capitalefficiency in the coming fiscal year and into the
future is to become an originator, setting up a

cash flow for a total of twenty years falls below its

J-REIT (Japanese real estate investment trust) for
the Sumitomo Realty Group to manage.
The measures to deal with losses implemented
during the Five-Year Business Reconstruction Plan

book value. The Company will therefore sell off
assets that conflict with this standard, i.e. landholdings without a specific plan for development,
and leased assets that do not generate an
investment yield of at least 2.5% on a book value
basis.
Assets affected under this standard amount toa book value of a little more than ¥140 billion,
representing 7% of total consolidated assets. We
estimate the loss on sale to be approximately ¥100
billion. An extraordinary loss of nearly ¥50 billion
was recorded in fiscal 2003, and we intend to takeanother extraordinary loss of approximately ¥50
billion in fiscal 2004. These measures will allow us
to mostly complete the early adoption of
impairment accounting within the time frame of the
New Three-Year Plan.

had a temporary negative effect on shareholders'equity, but the adoption of impairment accounting
is being managed in a way that will prevent a
recurrence of this situation. We will continue with
our recovery improvement efforts in an aim to
improve our debt rating.
Fixed-rate liabilities already account for 70% of
the Company’s interest-bearing liabilities, and we
intend to maintain this throughout the New ThreeYear Plan.
We are devoting all of our efforts towardattaining the goals of the management plan, andask our shareholders for their continued
understanding and support in this endeavor.

Improving Our Financial Position
uilding a stable financial base is an important
issue for Sumitomo Realty. The Group’s totalinterest-bearing liabilities (the total of loans,
corporate bonds, notes and guarantee
obligations) reached a peak of nearly ¥1,690 billion
in fiscal 1998. Within five years this has been
reduced by a little less than ¥550 billion, to a totalof ¥1,140 billion at the end of the fiscal year under

B

Junji Takashima, President
August 2003

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

3

Our History
1949

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

1957

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

1963

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 exchange.

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 the Tokyo
Sumitomo Building in Marunouchi,Tokyo.

1975

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

1980

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

1982

Completed construction of 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.

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).

2002

Completed construction of the Izumi Garden City (Roppongi 1-Chome Redevelopment project).

Sumitomo Realty & Development GroupLEASING BUSINESSCONSTRUCTION BUSINESS

Building Development Division
Building Management Division
Shintoshin Real Estate Co., Ltd.
Sumitomo Fudosan Tatemono Service Co., Ltd.

SALES BUSINESS
Condominium Development Division

Housing Business Division Number I
Housing Business Division Number II
Sumitomo Fudosan Syscon Co., Ltd.
Universal Home Inc.

OTHER BUSINESSBROKERAGE BUSINESS
Sumitomo Real Estate Sales Co., Ltd.

4

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

Sumitomo Fudosan Esforta Co., Ltd.
Izumi Restaurant Co., Ltd.
Sumitomo Fudosan Finance Co., Ltd.

LEASING

Outline of Operations
LEASING
OutlineSumitomo Realty made its full-scale entry into the leasing business in thelatter half of the 1970s, later than its main competitors. For this reason,
the leasing business has the following characteristics.

Sumitomo Realty’s Strengths

1. An outstanding leasing portfolio, concentrated in central Tokyo
The Shibakoen First Building [Completed July 2000]

Central 3 wards (Chiyoda, Minato, Chuo) ..........................................46%
Central 5 wards (plus Shinjuku and Shibuya).....................................70%
Central 7 wards (plus Shinagawa and Bunkyo)..................................80%
All 23 wards........................................................................................91%

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

Concentrationin Tokyo CBD (%)

Young Portfolio (%)

91

92

3. Direct involvement in operations, with deep knowledge of building
development and management

Buildings less than 10 years old.........................................................49%
Buildings less than 20 years old*.......................................................92%

As the IT revolution continues, the level of support facilities required by officebuilding tenants grows day by day, and buildings that do not provide IT support
or earthquake protection are quickly becoming less desirable. As many of
Sumitomo Realty’s buildings are of recent construction, they retain theircompetitive edge with tenants. Buildings now under construction, and all newbuildings completed since 1997, offer quake-absorbent structures and separate
climate control systems for each suite, as well as reinforced floors for heavyloads, high-capacity electricity systems, high ceilings and many other features
to satisfy tenants. In addition, as our buildings are newer, they require little
investment in refurbishment, allowing more funds to be allotted to investment
in new construction.
*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
high-rise buildings built under more stringent earthquake codes.

Sumitomo Realty gets directly involved in sorting out the complex tangles ofland ownership and rights in assembling lands for the construction of officebuildings. This has significantly reduced the cost of acquiring land fordevelopment, 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 todevelopment 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 thetenants. This allows pricing to be determined without interference from thirdparty real estate agents, and makes it possible to develop new office buildingsthat reflect future trends, offering the latest specifications and requirements.
Sumitomo Group personnel also directly manage the Company’s officebuildings. This allows the Company to accurately and promptly identify atenant’s need for relocation or larger space, and offer meticulous service toeach of its clients.

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

5

LEASING

Performancen the market for office space in Tokyo, because

regional cities, however, where the exodus ofunder review due to the rise in the vacancy rates, athe supply of large-scale buildings temporarily
increased during 2003 (the so-called 2003

companies continues and vacancy rates are morethan 10% across the board, more companies arefull year of operation from projects finished during

problem), the average vacancy rate at the end of
the fiscal year, as reported by several researchviewing the increase in supply in Tokyo as anopportunity to secure office space for integrationcompanies, rose to between 6% and 8%. The slow

and consolidation. Therefore, in the market overall

economy and prolonged deflation has fuelled thedesire among tenants to reduce their office costs,

the amount of contracted floor space remains at ahigh level.

resulted in rising income and profit for the leasing

and significantly reduced rents are being offered foreven competitive properties in order to quickly fill

Amid this business environment, although theleasing division experienced a slight falloff inrose ¥14,945 million from the previous fiscal year to¥192,979 million, while operating profit increased

vacancies, pushing rents down. In contrast with theincome from existing buildings during the period¥4,036 million to ¥53,261 million.

I

the previous fiscal year, such as the Sumitomo
Fudosan Shibakoen Tower, and new capacity
realized from such sources as Izumi Garden(Roppongi 1-Chome Redevelopment Project),division overall. Revenue from the leasing business

The Izumi Garden Tower (Roppongi 1-Chome Redevelopment Project) [Completed Oct. 2002]

OutlookT

he continuing anxiety over corporate
performance and business confidence ingeneral does not allow much room for

optimism. Though tenants have pressing needs
for integration and consolidation, expectations of
reducing office costs have not subsided, reflecting
deflationary pressures, and the slow demand for
expansion is expected to continue for some timeyet. In Tokyo, however, the competition between
new large-scale buildings, which was a directcause of worsening attitudes toward the market,
continues to subside, and because it is clear thatnew supply will decrease after 2004, the market for
new, large-scale buildings is expected to gradually
settle and return to normal. Although competition
among existing buildings from which tenants haveleft will intensify, if the shifting of tenants
continues, office buildings that offer better
facilities will attract demand, and those that havelost their competitive edge will have to berenovated or rebuilt. Once these stock adjustments
occur and progress, the balance of supply anddemand will begin to improve, and the 2003
problem will gradually fade and disappear.
Sumitomo Realty has secured tenants fornearly all of its newly completed medium-sizedbuildings, including those that will be completed infiscal 2005. Two of our newly built large-scalebuildings, however, such as the Izumi Garden
Tower and Sumitomo Fudosan Shinjuku Oak Tower(Nishi-Shinjuku 6-Chome Redevelopment Project),were completed with less than full occupancy. The
Company has sought to hold the line against lower
prices, and adopted a policy to take the timenecessary to acquire tenants under lease conditions
corresponding to the competitiveness of theproperty. The Company will continue to focus on
securing favorable tenants.
6

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

LEASING

LEASING BUSINESSRevenue & Operating Profit (Billions of yen)
152
44

153
46

165
46

178
49

193
53

200
54

1999

2000

2001

2002

2003

2004F

Revenue

Operating Profit

Yield On Leasing Assets (%)

The Sumitomo Fudosan Shinjuku Oak Tower (Nishi-Shinjuku 6-Chome Redevelopment Project) [Completed Jan. 2003]

VILLA FONTAINE HOTELS

S

umitomo Realty operates nine high-quality business hotels in central business districts, providing a
total of 1,341 rooms. By doing away with excessive personal services, and instead focusing on
spacious rooms with good quality beds and baths, these hotels offer the ideal space and services forthe harried business traveler.
This hotel concept has proven to be extremely popular, returning an average occupancy rate of 89%
during fiscal 2003. The Villa Fontaine Roppongi, opened in September 2002 and offering 189 rooms, reached
an occupancy rate of 85% within its first six months. The Villa Fontaine Shiodome (497 rooms) is scheduled
to open as part of the Shiodome Sumitomo Building complex in October 2004.

6.2
3.7

6.5
3.8

6.2
4.2

6.3
4.5

6.0
4.7

6.1
5.0

1999

2000

2001

2002

2003

2004F

Yield On Properties In Operation
Yield On Total Leasing Assets(Incl. underconstruction and land for development)

Location

Rooms

Roppongi
Hamamatsucho
OtemachiJimbocho
Kayabacho
HakozakiNihonbashi
Ueno
Shinsaibashi

189
119
143
72
294
163
85
186
90

Shiodome*

497*Scheduled to open in Oct. 2004

Villa Fontaine Roppongi (Superior Room)SUMITOMO REALTY & DEVELOPMENT CO., LTD.

Villa Fontaine Roppongi (Entrance)

7

SALESSALES
Development of the Real Estate Sales BusinessC

omprising the core of Sumitomo Realty’s sales
business, development and sales ofcondominiums accounts for 96% of total sales

in this segment. Sumitomo Realty commenced
its condominium sales business earlier than almost
all its competitors, earning the distinction of being
the pioneer in condominium sales in Japan.
The Company’s condominium operations are

Performance
expanding its business.
As with its leasing business, Sumitomo Realty
and the entire Sumitomo Realty Group engage
directly in purchasing land for development,planning products, selling condominium units andmanaging properties after condominium sales. Thisapproach enables the Company to provide high-In the condominium market, despite thecontinued favorable market conditions, such as atax deduction allowance for housing loans andstable low interest rates, the number of visitors
to sales showrooms declined, giving the feeling ofa slowdown from the previous fiscal year. In theTokyo area, downtown high-rise condominiums andlarge-scale properties near train stations drew thefocused mainly on Japan's six largest urban areas:

quality products and well-focused service withfeedback of customer needs.

the Tokyo metropolitan area, Osaka/Kobe, Sapporo,
Sendai, Nagoya, and Fukuoka. Sumitomo Realty

high operating margin are at the top of the industry.

location and product offering led to continued
support from a wide demographic encompassing

significantly increased its market share for fiveconsecutive years, ranking second nationwide in

Since market fluctuation risk can often determine
the fate of the condominium business, it is ourboth single persons and the elderly. As a result,although condominiums in the downtown area

terms of number of units provided in 2002. Looking
ahead, the Company will carry out its operations
with the aim of firmly maintaining its ranking withinpolicy to level this market risk by offering stablesupplies and pursuing brand enhancement
strategies through the continued sale of highquality units and products.

attracted many customers, and there is now awider range of areas in which sales prices arerising, sales prices for ordinary properties in thethe top five condominium providers, and continually
The City Tower Takanawa [Scheduled for completion in Mar. 2004]

The Company’s investment turnover ratio andattention of consumers, and improvements insuburbs continue to fall. In the regional cities as
well, the trend toward relocation to the city centerhas been notable.
Amid this business environment, total sales ofcondominiums, houses and residential landamounted to 4,499 units, 353 more than in theprevious year. Revenue from the sales businessrose ¥13,317 million from the previous year to¥183,745, and operating profit increased ¥1,399
million to ¥25,787 million. The number ofcondominium sales contracts concluded, as a resultof the smaller number of visitors to showrooms, fellby 331 units to 4,027 units.
The sales division’s revenue from operations
during the fiscal year under review included ¥1,302
million in income from the sales of buildings by theCompany’s subsidiary, Sumitomo Investment Co.,
(H.K.) Ltd. The sale of this building concluded theHong Kong business, and the subsidiary was
dissolved.
Sky Jacuzzi (The City Tower Yotsuya) [Scheduled for completion in Mar. 2004]

8

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

SALESSALES BUSINESSRevenue & Operating Profit (Billions of yen)
138
7

151
19

149
20

170
24

184
26

218
32

1999

2000

2001

2002

2003

2004F

Revenue

Operating Profit

Ranking of Condominium Suppliers
4,580
4,278

4,335

6th

3rd

2000

2001

3,885

2nd

7th
2,585

9th

1998

1999

2002

Number of Units Supplied (Calendar Year)

The Yokohama City Tower Bashamichi [Completed Mar. 2003]

OutlookT

he slowdown in the economy, and the end oftax-reduction measures in December 2003
clouds the future of the sales environment.

Sumitomo Realty will complete five high-rise
condominium projects in downtown areas during
the fiscal 2004: City Tower Ikebukuro, City Tower
Osaki, City Tower Yotsuya, City Tower Takanawa
and City Tower Osaka. This will significantly add toour product offerings, and will allow us toovercome the increasingly harsh market conditions.
Of the 4,500 condominium and housing units theCompany expects to sell during the fiscal 2004 (2%more than the previous year), approximately 50% of
the contracts had been concluded as of March 31,
2003. The Company will redouble its sales efforts inorder to meet its target.
Although competition to acquire land for largescale urban projects is growing increasingly fierce,
and the price of land has risen noticeably, as aresult of Sumitomo Realty’s preemptive securing ofurban locations ahead of its competition, most of
the land for projects during fiscal 2005 has alreadybeen acquired, and healthy performance is
expected in the following two fiscal years.

The Park Square Neos Yokohama (Entrance Lobby) [Completed July 2002]
SUMITOMO REALTY & DEVELOPMENT CO., LTD.

9

CONSTRUCTIONCONSTRUCTION
PerformanceThe market for new detached houses remainedsluggish nationwide, and the market for
remodeling, which had continued to grow,began to show signs of stagnation due to theeffects of the slowdown in consumption.
In response to the prolonged slowdown in themarket for new detached houses, the Company
decided to merge the standardized houses andimmediate efficiencies realized from reductions inindirect costs, the Company believes that bystrategically restructuring the personnel and skillsof both divisions, it will improve sales and productdevelopment capacities, construction ability andmaterial purchasing power.
In total, revenue from the construction

and interior and exterior work, increased ¥9,135
million during the fiscal year under review to¥124,464 million. Due to greater efficiencies
realized by lowering indirect costs through themerger with the new detached house business,
operating profit rose markedly, increasing ¥2,220
million for a total of ¥6,992 million.

business, which includes general refurbishments

custom-built homes businesses, which it had
previously kept separate to focus on theirrespective strengths. The merger of the custom-

Sales Performance for Fiscal 2003

built home business of Sumitomo Fudosan Home
Co., Ltd., and Sumitomo Realty’s Housing Business

Shinchiku Sokkurisan
New Detached House
Universal Homes*

Division I, which handled standardized houses,
became effective October 1, 2002. In addition toOrders Received
4,121
2,083
3,032

YoY Change
+351
-279
-862

Units Completed
3,970
2,249
2,258

YoY Change
+423
-298
-725

Note: Universal Home, Inc. is a franchiser specializing in standardized houses using conventional construction methods.

OutlookB

ecause orders for new detached houses are
expected to remain slow during fiscal 2004,
the Company will press ahead with cost

reductions aimed at further realizing
efficiencies from business integration, such as

consolidation of sales offices. It will also seek torevitalize its product capacity with the launch of
new three-story houses. The Shinchiku Sokkurisan
business will be relaunched with an increase inpersonnel, mainly in urban areas, which will

increase sales capacity and serve to broaden theappeal of the brand. The Company will also focus
on greater sales of Reform Choice, a fixed price,partial refurbishment product developed by
Sumitomo Fudosan Syscon Co., Ltd.

”Series of World Home Designs“

Product Lineup
New Detached Houses
he Company has in the past contracted out
construction of detached houses in thesubdivisions it has developed, but in 1982 split
off this business and established Sumitomo
Fudosan Home Co., Ltd to develop the businessitself. In the early years of this business, Sumitomo
Fudosan Home adopted designs and construction
methods used in and around Los Angeles by its
sister company in California, Sumitomo Realty &Development, CA Inc. (then La Solana Corporation).
Its mainstay products were custom-designed,
midrange and upscale wood-frame houses.
Because competition from large builders of
midrange and upscale homes was intense,
however, Sumitomo Fudosan Home had tocontinually struggle against the prolonged
downturn, building just around 1,000 units per year.
The standardized housing business, however,taking a hint from the construction of emergency
housing for victims of the Kobe earthquake, began
operations in 1995 with the launch of the American

T

10

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

Comfort line of high-quality, low-cost, Westernstyle standardized houses. Although this businesshas attracted a good deal of attention in theindustry by achieving an annual growth rate of over
30%, the number of competing products in thisprice range has increased, and growth has saggedover the past several years. In 2002 the Company
added a new Mediterranean style home, expanding
its design portfolio to cover nine styles from sevencountries, and changed the brand name for the line
to “Series of World Home Designs.”
The integration of the detached andstandardized housing businesses in October 2002
enhanced the Company’s product development
ability. One of the first results of this combined
operation was the introduction in April 2003 of two
new three-story, urban home designs (J-Urban and
Tyrol), both of which have proved popular.

CONSTRUCTION

The Shinchiku Sokkurisan Full Remodeling Package

I

HOUSING BUSINESSRevenue & Operating Profit (Billions of yen)n the renovation market in Japan, an outdatedwith a transparent fixed price, for which a house

construction system keeps prices high, and there
is a risk of cost overruns. It is widely believed

can be fully remodeled at half the cost of
rebuilding, and in half the time. The marketingthat it is less expensive to simply rebuild.
Sumitomo Realty overturned this common

slogan “Sono tatekae matta!” (Hold off on thatrebuilding!) has helped enhance the appeal of theassumption in 1996 with the development of

product. It has become popular as an alternative to

Shinchiku Sokkurisan, which provides the customer

rebuilding, and is demonstrating impressive
performance.

67
2.4

87
4.8

114
4.0

115
4.8

124
7.0

128
7.0

1999

2000

2001

2002

2003

2004F

Revenue

Operating Profit

Housing Units Sold By Key Commodities (Units)
695
1,835

1,569
2,405

2,951
2,801

3,770
2,362

4,121
2,083

4,600
2,000

1999

2000

2001

2002

2003F

2004F

BeforeShinchiku Sokkurisan”Shinchiku Sokkurisan“

New Detached House

After

J-Urban HomeR

esidential neighborhoods in Japan aredensely built-up, and most of the lots are
small, creating problems for homeowners

including access to sunlight andapprehensions about security. The J-Urban design
eliminates these concerns, offering a comfortableliving space ideally suited to the urban lifestyle.

numerous openings that provide light without
sacrificing earthquake resistance, and allows forsecurity-conscious planning of the building exterior.

Private internal patio
At the center of the structure is an open, private
patio, offering a space to enjoy the sun and fresh
air without concern for the outside world.

Main Features

Amenities on a par with an upscale condominium

Outer facade in harmony with the urban environment

Kitchen and bath facilities standard with J-Urban
are the same as those used in luxury
condominiums, providing an air of opulence to thehome.

Beginning with a modern exterior that emphasizes
the simple beauty of straight lines, high-grade
materials such as glass and stone are employed tocreate a facade to please any connoisseur of urban
design.

New techniques and designs for better lighting
Sumitomo Realty has developed for J-Urban a
structural wall known as Light Wall (patentpending). This innovative product incorporates

Reference: Construction on an architectural area of 100m2 isapproximately ¥15 million, not including outer facilities andexterior construction.

Fixed price system
So long as the total architectural area remains thesame, the final plan can be changed toaccommodate the site conditions without changes
in the price.
J-Urban Home
SUMITOMO REALTY & DEVELOPMENT CO., LTD.

11

BROKERAGEBROKERAGE
OutlineThe Company’s real estate brokerage business isconducted through Sumitomo Real Estate Sales
Co., Ltd., which was established in 1975 to

PerformanceIn the market for existing housing, although

BROKERAGE BUSINESSRevenue & Operating Profit (Billions of yen)
28
5.3

32
7.2

35
8.7

36
8

38
7.8

39
8

1999

2000

2001

2002

2003

2004F

activity among people seeking to change theircurrent residence remained slow, there was anhandle the sale of condominiums developed by
Sumitomo Realty. It entered the real estate

upsurge in service needs among older couples
wishing to return to the city center and first-timebrokerage sector in 1979, where it has achieved

property buyers, leading to a rise in the number ofsignificant success, and was subsequently listed on
the Tokyo Stock Exchange in June 1998.

units handled in the market overall. Although theaverage contracted rate for pre-owned

Sumitomo Real Estate Sales operates a

condominiums in the Tokyo area saw its first year-

network of community focused branch offices under
the Sumitomo Real Estate Sales STEP brand name.

on-year rise since the collapse of the bubble
economy, in Osaka and other regions prices

The number of offices reached 206 by the end of
fiscal 2003, and this expanding and upgrading ofcontinued to fall.
Amid this environment, the brokerage businessthe network of brokerage offices has helped tosteadily grow the business. All brokerage offices
are directly owned and operated and boast highduring the fiscal year under review opened five new
brokerage offices, renovated several existing
offices, and strengthened its IT strategy byprofit margins. Sumitomo Real Estate Sales holds
the No. 1 position in the industry in terms oflaunching Motomu Net, an online service to help
identify people seeking to sell property. As a result,brokerage revenues on a nonconsolidated basis.
The Company plans to further expand its marketingbase and steadily increase its market share.

the Company was able to increase the number ofproperties it handled during the fiscal year, andincrease its market share. Also, due to the increasein condominium sales brokered by the Company,
revenue from the brokerage business increased¥1,393 million from the previous fiscal year to¥37,577 million, while operating profit slippedslightly, down ¥161 million to ¥7,792 million.

Revenue

Operating Profit

Chart of Brokerage Business
23,051

23,96824,436

2002

2003

21,431
17,734

1999

2000

2001

Number of brokerage transactions

Outlook
ith the notable exception of Tokyo, themarket for existing housing is unlikely torevitalize during fiscal 2004, and the fall in
prices is expected to continue. Whilecontinuing to open new offices and renovate
existing ones, therefore, the Company will seek toincrease its market share and raise earnings andrevenues by making greater use of the customer
relationship management (CRM) system, as well as
more deeply utilizing customer information received
through the Internet.
The Company also intends to focus on suchgrowth areas as corporations and wealthy
individual investors, and adopt other measures tocounter the difficult operating environment whileworking to grow the business.

W

The Head Sales Office of Sumitomo Real Estate Sales Co.,Ltd. at The Shinjuku NS building

12

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

Financial Section

Corporate Development and Financial Background ............................................ 14
Consolidated Balance Sheets.............................................................................. 18
Consolidated Statements of Operations ............................................................ 20
Consolidated Statements of Shareholders’ Equity ............................................. 21
Consolidated Statements of Cash Flows ............................................................ 22
Notes to Consolidated Financial Statements ..................................................... 23
Report of Independent Public Accountants......................................................... 35

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

13

Corporate Development and Financial Background1950 to 1993 Fiscal Years / Founding through the Collapse of the Bubble
Sumitomo Realty was formed from the dissolution of the Sumitomo zaibatsu,
one of the four major family-dominated financial and industrial combines that
had largely controlled the Japanese economy until the end of the Second World
War. Inheriting the respected Sumitomo brand, it was incorporated in 1949 as
an independent company within the Sumitomo Group to manage the residual
real estate assets of the zaibatsu. The name, however, was one of the few
assets the Company inherited. In comparison with Mitsubishi Estate, whichbecame heir to the entire Marunouchi area, and Mitsui Fudosan, which took
over the real estate business of the Mitsui zaibatsu, Sumitomo Realty was far
behind these two giants in terms of assets at the time of its founding. Mitsui
Fudosan and Mitsubishi Estate quickly established stable foundations in theleasing business, and were publicly listed in 1949 and 1953, respectively,
twenty years ahead of Sumitomo's listing in October 1970.
At the time of its listing Sumitomo Realty was known as a pioneer incondominium development, being one of the first companies in Japan to engage
in that business. With housing developments constituting the major portion of
the Company's business, the risks involved were great, since the Company did
not have a base on which to fall back. The recession sparked by the oil shockthat occurred soon after the public listing caused the Company to suffer four
straight years of ordinary losses. To escape from this management crisis theCompany sold off nearly all of the few assets it possessed, including the former
headquarters building in Marunouchi. It also withdrew from the business oflarge-scale residential land developments, which at the time was considered tobe the defining element of the real estate development business. It instead
turned its attention to two areas from which high performance could be
expected from limited capital: condominium developments, and the leasing of
office buildings in Tokyo. This strategy was a success, lifting consolidated
revenue, which only reached ¥43.2 billion in fiscal 1978 (ended March 31, 1978,
the first year the Company prepared consolidated earnings statements), sevenfold to ¥300.6 billion in fiscal 1991. Consolidated operating profit during thisperiod increased by a factor of 15, from ¥4.4 billion to ¥65.3 billion. The
strength of Sumitomo Realty’s current portfolio, which is heavily weighted with
Tokyo properties and contains many comparatively new buildings, is a direct
result of the success of these strategies 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

Revenue From Operations (Billions of yen)straits. First to suffer was the Company’s sales division, which was left withlarge quantities of leftover properties for sale when the retail price for
condominiums, which had been rising rapidly, began to tumble. The brokeragedivision soon after saw its operating income fall to half its former level as thevolume of land transactions dried up and prices collapsed. Next to be hurt was
the financing business, which had grown rapidly by providing real estate loans
using rising land prices as collateral, falling into the red as bad debts mounted.
Finally, earnings in the leasing division began to fall as the vacancy rateskyrocketed due to the burgeoning supply of office buildings planned during the
bubble, while rents spiraled downward. The cumulative effect of this situation
was that the Company’s actual earnings (ordinary profit excluding gains fromsale of assets) slipped into the red.
These actual losses continued for four straight fiscal periods, from fiscal
1993 to 1996. The Company began referring to this period as its second
management crisis (the first being the post-oil shock depression), andformulating measures to lift itself out of the predicament.

1994 to 1997 Fiscal Years / The Struggle to Readjust
Sumitomo Realty adopted the following measures to reverse the actual losses
and restore profitability:> To reduce personnel expenses and maintain a sense of crisis, theorganizational structure was simplified, including elimination of morethan half the general manager positions (64 positions to 27), and salaries
for both management and senior staff were reduced.
> New construction of office buildings was suspended, and all
development personnel shifted to tenant sales.
> To develop and expand businesses not involving acquisition of land (nonland businesses), a large number of employees were shifted tosubsidiaries handling custom-built homes, remodeling and refurbishment,
and building management.
> New non-land businesses were launched, including the American
Comfort line of standardized housing in October 1995, and the Shinchiku
Sokkurisan full remodeling package in April 1996.

Fiscal 1995 was the low point in terms of actual earnings, but, bolstered by arecovery in the office building market, the Company managed a return toprofitability in fiscal 1997.

Operating Profit (Billions of yen)

580

389

1999

14

422

2000

459

2001

498

534

71

75

2000

2001

80

89

95

57

2002

2003

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

2004F

1999

2002

2003

2004F

1998 to 2001 Fiscal Years / The Five-Year Business Reconstruction Plan

utilize is well regarded, and the capacity to gather information realized fromOnce the actual losses had been eliminated and profitability restored,

direct sales is one of the key reasons the Company was able to predict themarket recovery ahead of its competitors.

Sumitomo Realty undertook a full-fledged recovery program to reform andrestructure its balance sheets, setting the following four targets:> Restore business performance to fiscal 1991 levels (the peak of the
bubble years)> Eliminate excessive anticipatory investments (begin construction on landacquired for the leasing business)> Dispose of nonperforming assets (the financing business, overseas
operations, etc.)> Reduce interest-bearing liabilities (to fiscal 1991 level)

Each of these targets was achieved a full year before the end of the five-year
plan.

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 supplied
during 1997 was 2,272, making the Company tenth in the ranking of suppliers
nationwide for that year. The specific target adopted for the condominium
business under the reconstruction plan was to expand the business to ensure astable supply of more than 4,000 units annually, and increase the Company’s
share to 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 thesales division increased 114%, or ¥10.5 billion over the four-year period.
During the first half of the plan the Company continued selling thecondominiums 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

1. Restoring business performance
Sumitomo Realty was one of the first companies to foresee a recovery in themarket for office buildings in Tokyo. Construction was resumed in 1995, aheadof others in the industry. The Shibuya Infoss Tower was completed in 1997, and,backed by a recovery in the market at large, the Company succeeded inacquiring contracts with many favorable tenants. Although a temporary setback
was suffered with the failures of large-scale financial institutions in 1998, thetwelve office buildings completed during the term of the five-year businessreconstruction plan were all leased to full capacity at the time of theircompletion. 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.
Another important factor in restoring performance was resolving the issueof land for building lease properties on which construction had not begun. The
book value of this land exceeded ¥500 billion in fiscal 1995, but throughaggressive development had been reduced to ¥124.3 billion in fiscal 2001,
representing 9% of the leasing business’s assets. This significantly reduced
excessive anticipatory investments, another of the plan’s targets.
Sumitomo Realty contracts with few outside brokers for its tenant sales,choosing instead to use a direct sales structure operated by the Company’s own
sales professionals. The high degree of sales ability the Company is able tobillion 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 thisdivision (over 13%) positioned Sumitomo Realty among the top class ofcompanies in the industry.
Of Sumitomo Realty’s four core businesses, the leasing and sales
businesses require huge capital investments, as they must acquire land,
construct buildings and then lease or sell these to customers. The construction
and brokerage businesses, by contrast, do not require such a great investmentof capital. Sumitomo Realty has carried out personnel buildups for both of thesebusinesses in order to create a healthy business portfolio and improve theoperational balance. As a result, operating profit during the four-year period forthe two business types increased by 90%, or ¥6.0 billion.

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 andshowed little promise of profitability. The financing business had recorded¥146.0 billion in losses from the disposal of bad loans, reducing the total value

ROA (%)ROE (%)

4.8

11.3
5.7

4.5

7.0
2.3

2.8
3.9

4.0

4.2

3.2
(8.8)

1999

2000

2001

2002

2003

2004F

1999

2000

2001

2002

2003

2004F

Note: Operating Profit divided by total assets

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

15

of ordinary loans, which had reached ¥333.5 billion in fiscal 1991, to a mere
¥18.4 billion (after allowance for bad debts). The overseas business began
aggressively selling assets, recording ¥22.6 billion in losses on sales in fiscal

would have been forced to sell at lower prices domestic investment real estate
for which there was little risk capital available. The Company therefore injected
capital into certain investment vehicles, easing the risk for investors and2000. This reduced the Company's stake, which had reached ¥175.9 billion in
fiscal 1991, to ¥13.6 billion.

allowing capital to be recovered at a reasonable cost to the Company.
For institutional investors who required bankruptcy remote, the Company

Sumitomo Realty recorded approximately ¥210 billion in extraordinary

offered a securitization scheme employing a special purpose company (SPC),
and for individual investors who valued the reliability of the Sumitomo brand,

losses during the reconstruction plan, including expenses incurred from thewithdrawal from these businesses. These losses were for revaluation ofproperties for sale, additional reserves related to the adoption of current value
accounting for retirement benefit liabilities and such financial assets asmarketable securities, among other factors. With the exception of impairment
accounting for leasable real estate recorded as fixed assets, almost all the
unrealized capital losses on assets had been accounted.

the Company offered investment in SURF.
After 1999, private equity funds were created in succession, and thenumber and size of J-REITs grew, resulting in more risk capital flowing into thereal estate 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 ofreal estate securities in Japan, becoming the model for the growing

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 fordevelopment of land for the leasing business. Since the total of operating cash
flow was devoted to capital investment, however, it became necessary to either
recover invested capital or liquidate assets in order to reduce debt.
Unfortunately, the large-scale failure of financial institutions in 1998 severely
limited the total amount of risk capital available to the real estate market, andgreater creativity was necessitated.

securitization of real estate. The SURF investment had attracted a total of
12,000 individual investors by the end of the 2003 fiscal year, growing into alarge-scale investment product with more than ¥120.0 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 werecarried 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. This
had been reduced to ¥1,286 billion by the end of fiscal 2001, a reduction of

The principal measures undertaken were:> Disposal of overseas assets and nonperforming loans> Securitization of office buildings in Japan (ABS-type)> Selling of interests in SURF (Sumitomo Real Estate Fund), an investment
scheme for office buildings in Japan similar to a U.S.-style limited
partnership, where Sumitomo Realty acts as general partner> Assignment of receivables related to condominium sales¥400 billion during a three-year period. This was roughly the same level asGroup’s interest-bearing liabilities at the end of the 1991 fiscal year (¥1,242
billion), the height of the bubble period.

Sumitomo Realty chose to sell off certain assets in the overseas andnonperforming loan markets, which had ample supplies of risk capital, but

Total Assets (Billions of yen)Interest-Bearing Debt (Billions of yen)
1,973

1,916

2,016

2,000

1,904

1,618

1,827

1,382

1,286
1,193

1999

16

2000

2001

2002

2003

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

2004F

1999

2000

2001

2002

1,140

2003

1,050

2004F

which no cash flow is expected, as well as currently leased properties whose

2002 to 2004 Fiscal Years / The New Three-Year Plan
Sumitomo Realty achieved far-reaching success during the course of thereconstruction plan in restoring performance to its historical highs, reducing
nonperforming assets, and making significant reductions in interest-bearing
debt. To continue to build on this success and ensure continuing increases inincome and earnings, the Company formulated the New Three-Year Plan withthe aim of further improving its financial position.

identified under this standard was ¥143.5 billion. The assets are being sold off
over two fiscal periods (2003 and 2004), with a loss on sale of approximately¥50 billion recorded in each. The Company believes that this action will severely
limit the risks from valuation losses associated with impairment accounting.
Nearly all large-scale, listed companies in the real estate industry, until
fiscal 2002, made use of special measures in the Land Revaluation Law that

1. Performance
Comparison of performance results for fiscal 2001 (the year prior to the launch of the New
Three-Year Plan) with performance forecasts for fiscal 2004

Revenue from Operations
Operating Profit
Ordinary Profit

NOI is less than 2.5% against its book value. The total book value of assets

Fiscal 2001

Fiscal 2004 (forecast)

Increase¥459.2 billion¥75.2 billion¥38.5 billion¥580.0 billion¥95.0 billion¥65.0 billion+26.3%+26.3%+68.8%

allowed them to offset unrealized losses in land against unrealized gains.
Certain companies have also taken a special depreciation for buildings withnotably high book values. It is often remarked that these measures havealleviated their impairment accounting risks. Sumitomo Realty did not make useof these special measures, preferring instead to resolve the issue by recording
losses on sales. This is because the Company has held comparatively fewer
assets since its founding, and was a latecomer to the leasing business.
The result of this difference in approach is that, while assets of othercompanies swell and their profit ratio on those assets falls markedly, Sumitomo
Realty expects continued improvement in its asset margin ratio.

Increases in revenue are expected for all four core businesses (Leasing, Sales,
Construction and Brokerage) for each fiscal period of the current plan.

3. Improving the financial position

2. Anticipating the introduction of impairment accounting

Interest-bearing liabilities are continuing to be reduced under the New ThreeYear Plan. The target for interest-bearing liabilities at the end of fiscal 2004 is¥1,050 billion, representing additional cuts of ¥236 billion during the three-year

Japan’s Business Accounting Council resolved in August 2002 to require
impairment accounting for fixed assets from the 2006 fiscal year. For the realestate industry, impairment accounting applies mainly to lease properties, andwill be required when an asset's undiscounted future cash flow for a total of 20
years (including income from the sale of the asset 20 years hence) falls below
its book 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

period from the end of fiscal 2001, the period proceeding the start of the plan.
Since measures for the adoption of impairment accounting have taken
priority, however, recovery for the capital base has been delayed. The Company
expects that the debt/equity ratio will be 4.9 at the close of the current plan.

4. Toward establishment of a J-REIT

impairment accounting. (So long as the NOI is at least 2.5%, the combined totalof operating income over a 20-year period and the expected income from sale of
the asset at a cap rate of 5% should equal the book value.)
Sumitomo Realty made public in November 2002 its decision to pursue apolicy of selling off during the period of the current three-year plan assets thatwill require impairment accounting, and recording a loss on the sale of such
assets. Specifically, the Company reviewed the status of land and buildings in
its portfolio, disposing of raw land not scheduled for development and from

Sumitomo Realty plans to establish and directly operate a J-REIT (Japan realestate investment trust) in order to reduce its interest-bearing liabilities andpromote smooth reshuffling of its asset holdings.

Interest-Bearing Debt / Operating Profit Ratio (Times)

Debt / Equity Ratio (Times)

24

6.7

6.4

6.6
5.6

19

5.4
4.9

17

1999

2000

2001

15

13

2002

2003

11

2004F

1999

2000

2001

2002

2003

2004F

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

17

Consolidated Balance Sheets
March 31, 2003 and 2002

Thousands of
U.S. dollars (Note 1)

Millions of yen

AssetsCurrent assets:Cash, time and notice deposits (Note 4)
Marketable securities (Note 8)
Securitized properties for sale (Note 8)
Notes and accounts receivable—trade
Trading loans receivable
Allowance for doubtful accounts
Inventories (Note 5)
Deferred income taxes (Note 12)
Other current assets
Total current assets

2003

¥

Investments and advances:
Investments in and advances to unconsolidated
subsidiaries and affiliates (Note 6)
Investments in securities and other (Note 8)
Allowance for doubtful accounts
Total investments and advances
Property and equipment (Note 7):Land
Buildings and structures
Machinery and equipment
Construction in progress
Accumulated depreciation
Net property and equipment
Other assets:
Guarantee and lease deposits paid to lessors
Leasehold rights and other intangible assets
Deferred income taxes (Note 12)
Other
Total other assets¥
See accompanying notes.

18

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

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

2002¥

87,472
129
21,915
20,347
106,696(37,738)
156,535
20,61929,024404,999

2003$

846,090150
232,779
207,171744,692(315,341)
1,340,732
119,476
347,096
3,522,845

8,149
92,037(27,121)73,065

9,874
71,937(26,154)
55,657

67,795
765,699(225,632)
607,862

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

925,283
334,601
16,63647,371
1,323,891(123,839)
1,200,052

7,822,704
2,991,730
144,502115,507
11,074,443(1,083,353)
9,991,090

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

187,653
68,986
5,187
50,201
312,027
1,972,735

1,544,309
460,399
125,441
517,330
2,647,479
16,769,276¥$

Thousands of
U.S. dollars (Note 1)

Millions of yen

Liabilities and Shareholders’ Equity
Current liabilities:
Short-term debt (Note 9)Long-term debt due within one year (Note 9)
Notes and accounts payable—trade
Accrued income taxes (Note 12)
Accrued bonuses
Deferred income taxes (Note 12)
Other current liabilities (Note 13)
Total current liabilities

2003

¥

2002

292,851
217,862
54,793267
2,732
7
222,626
791,138¥

311,457
272,599
37,823
2,453
2,408
19
138,647
765,406

2003$

2,436,364
1,812,496
455,849
2,221
22,72958
1,852,130
6,581,847

Long-term debt due after one year (Note 9)
Guarantee and deposits received (Note 13)
Deferred income taxes (Note 12)
Allowance for employees’ severance and retirement benefits (Notes 10)
Directors’ and corporate auditors’ retirement benefits
Other long-term liabilities

627,405369,362
—
4,310
287
1,006

603,804
372,251
47
3,743
282
1,045

5,219,676
3,072,895—
35,8572,388
8,369

Minority interests

10,33812,39086,00786,787
96,822
34,693
218,302(4,886)(1,370)(225)
211,8212,015,667

86,787
96,822
32,165
215,774(2,159)182(30)
213,767
1,972,735

722,022805,507288,627
1,816,156(40,649)(11,398)(1,872)
1,762,237
16,769,276

Contingent liabilities (Note 18)
Shareholders’ equity (Note 14):
Common stock
Authorized — 780,000 thousand shares
Issued— 407,086 thousand shares
Capital surplus
Retained earnings
Net unrealized holding losses on securities
Foreign currency translation adjustments
Treasury stock
Total shareholders’ equity¥¥$

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

19

Consolidated Statements of Operations
Years ended March 31, 2003, 2002 and 2001

Thousands of
U.S. dollars (Note 1)

Millions of yen
2003

Revenue from operations (Note 3)
Costs and expenses:
Cost of revenue from operations (Note 3)
Selling, general and administrative expenses (Note 3)¥

Operating income
Other income (expenses):
Interest expense, net
Dividend income
Loss on sale of property and equipment
Loss on sale and devaluation of property and equipment (Note 11)
Loss on devaluation of investments in securities
Loss on sale of investments in securities
Provision for allowance for doubtful accounts
Foreign exchange gains
Loss from write-down of property and equipment
Loss from sale and write-off of loans receivable
Net transition obligation
Other, net (Note 3)
Income (Loss) before income taxes and minority interest (Note 3):
Income taxes (Note 12):Current
Deferred
Total
Minority interest
Net income (loss)

¥

2002

533,915¥

2001

497,877¥

459,2452003$

403,777
41,626445,40388,512

377,199
40,308417,507
80,370349,597
34,430384,027
75,2183,359,210
346,306
3,705,516
736,373(25,660)
626—(48,666)(4,643)
(500)
—
371
(598)
—
—
(7,410)(86,480)
2,032(28,200)
526
(202)
—
(3,750)
—
—
375
(478)
—
—
(6,307)(38,036)
42,334(34,491)
283
(375)
—
—
—
(14,828)14(501)(50,111)(1,681)(2,613)(104,303)(29,085)(213,478)
5,208—(404,875)(38,627)(4,160)—
3,087(4,975)——(61,648)(719,468)
16,905781(1,903)(1,122)

4,608
13,10917,717

5,097(18,221)(13,124)

6,498(15,832)(9,334)(1,820)

1,621

2,047

(15,142)

4,974¥

22,996¥(18,008)$

Yen

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

20

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

¥4,441,889

12.22
6.00

¥

41,381

U.S. dollars (Note 1)

56.50
6.00

¥

(44.27)
6.00

$

0.10
0.05

Consolidated Statements of Shareholders’ Equity
Years ended March 31, 2003, 2002 and 2001
Thousands
Number ofshares ofcommon stock

Balance at March 31, 2000
Increase due to change in consolidated
subsidiaries
Net loss
Foreign currency translation adjustments
Adoption of new accounting standard
for financial instruments
Cash dividends paid(¥6 per share)
Bonus to directors

406,810

Commonstock

Additional
paid-in
capitalMillions of yen
Net unrealized
holding gains
Retained(losses) on
earnings
securities¥86,773¥96,822¥31,942¥

Foreigncurrencytranslation
adjustments

Treasurystock—¥ (4,395)

¥

(2)

—

1,555

—

—

—

—

195
(18,008)
—

—

—

—

—

1,016

—

—

—
—

—
—

—
—

(2,441)
(15)

—
—

—
—

—
—

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

86,77396,822

11,673

1,016(2,840)

(2)

—
—
—
—
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

407,086¥86,787¥96,822¥34,693¥ (4,886)¥ (1,370)¥ (225)

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

Foreigncurrencytranslation
adjustments

Commonstock

Additional
paid-in
capitalBalance 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($0.05 per share)
Bonus to directors$722,022—————$805,507—————$267,596
41,381———83$ (17,962)——(22,687)——$ 1,514—(12,912)———$ (250)———(1,622)
—

—
—

—
—

(20,316)
(117)

—
—

—
—

—
—

Balance at March 31, 2003

$722,022$805,507$288,627$ (40,649)$ (11,398)$ (1,872)

Treasurystock

See accompanying notes.

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

21

Consolidated Statements of Cash Flows
Years ended March 31, 2003, 2002 and 2001

Thousands of
U.S. dollars (Note 1)

Millions of yen
2003

Cash flows from operating activities:
Income (Loss) before income tax and minority interest
Depreciation and amortization
Provision for (reversal of) allowance for doubtful accounts
Loss on devaluation of investments in securities
Loss on sale of investments in securities
Increase in employees’ severance and retirement benefits
Interest and dividend income
Interest expense
Loss on sale of property and equipment, net
Loss on sale and devaluation of property and equipment (Note 11)
Loss from write-down of property and equipment
Increase in securitized properties for sale
Decrease (Increase) in notes and accounts receivable-trade
Decrease in trade loans receivable
Increase in inventories
Increase (Decrease) in advances received
Increase (Decrease) in notes and accounts payable-trade
Other, net
Total

¥

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

2002

2,032
11,973
1,134
4,643
500
567
(956)
25,991—
48,666598(6,065)(4,512)
2,031(6,627)(294)
16,984
10,090106,755¥

2001

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

2003(29,085)
10,377(36,259)——
1,818(1,187)35,395
375
—
—
—
272
96,302(21,195)
7,384(12,340)(7,041)44,816$

16,90599,6099,434
38,627
4,160
4,717(7,953)
216,231—404,875
4,975(50,458)(37,537)
16,897(55,133)(2,446)141,298
83,944
888,145

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

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

1,328(37,202)(5,686)
3,256

11,032(218,103)(36,057)
645,017

Cash flows from investing activities:
Proceeds from sale of property and equipment
Payments for purchases of property and equipment
Payments for purchases investments in securities
Proceeds from sale of investments in securities
Increase in short-term loans
Decrease in guarantee and lease deposits paid to lessors
Increase (Decrease) in guarantee and lease deposits received
Payments for Tokumei Kumiai (partnership) investments
Receipts of deposits to partnerships
Restitution of deposits to partnerships
Other, net
Net cash provided by (used in) investing activities

14,369(55,616)(47,489)
22,037—59(6,736)(8,015)71,790(13,414)(10,634)(33,649)

4,264(56,241)(22,134)
925
—
8,508
(1,792)(12,346)
97,392(5,245)(1,123)
12,20879,582(55,015)(18,429)
2,659
178
50,897
8,392(12,271)
55,397—
201
111,591

119,542(462,696)(395,083)
183,336—491(56,040)(66,681)597,255(111,597)(88,469)(279,942)

Cash flows from financing activities:
Decrease in short-term debt
Proceeds from issuance of bonds and notes
Repayments of bonds and notes
Increase (Decrease) in long-term debt
Proceeds from assignment of advances received
Cash dividends paid
Other, net
Net cash used in financing activities(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)(33,096)
70,000(133,690)
4,877
29,149(2,643)2,550(62,853)(154,792)
1,054,077(885,557)(411,073)
97,346(22,221)24,766(297,454)

8

1,395

151

66

8,136
87,567(4,812)
92,37952,14540,236

67,687
728,511

Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Increase (Decrease) in cash and cash equivalents resulting
from changes in the number of consolidated subsidiaries
Cash and cash equivalents at end of year (Note 4)
See accompanying notes.

22

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

¥—
95,703¥—87,567¥(2)
92,379$—796,198

Notes to Consolidated Financial Statements
Years ended March 31, 2003, 2002 and 2001

1. Basis of financial statements
Sumitomo Realty & Development Co., Ltd. (the "Company") and its consolidated
domestic subsidiaries maintain their official accounting records in Japanese yen,
and in accordance with the provisions set forth in the Japanese Commercial Codeand accounting principles and practices generally accepted in Japan ("Japanese
GAAP"). The accounts of overseas subsidiaries are based on their accounting
records maintained in conformity with generally accepted accounting principles
and practices prevailing in the respective countries of domicile. Certain accounting
principles and practices generally accepted in Japan are different fromInternational Accounting Standards and standards in other countries in certain
respects as to application and disclosure requirements. Accordingly, theaccompanying consolidated financial statements are intended for use by those
who are informed about Japanese accounting principles and practices.
The accompanying consolidated financial statements have been restructured
and translated into English (with some expanded descriptions and the inclusion of
consolidated statements of shareholders’ equity) from the consolidated financial

statements of the Company prepared in accordance with Japanese GAAP and filedwith the appropriate Local Finance Bureau of the Ministry of Finance as required by
the Securities and Exchange Law. Some supplementary information included in
the statutory Japanese language consolidated financial statements, but notrequired for fair presentation, is not presented in the accompanying consolidated
financial statements.
The translation of the Japanese yen amounts into U.S. dollars are included
solely for the convenience of readers outside Japan, using the prevailing exchange
rate at March 31, 2003, which was ¥120.20 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 statements
translation 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.
Effective April 1, 2001, as explained in Note 3, the Company changed themethod of recognition of revenue and expense from the real estate business whichused Special Purpose Companies ("SPC") to record in revenue from operations.

expense in the period they were incurred. In the year ended March 31, 2001, a
consolidated subsidiary of the Company introduced cost accounting system with
the intent to better manage consignment sales activities, by matching revenue
from sales of consigned properties and costs associated to such properties, thisresulted in recording the costs of non-delivered estate amounting to ¥966 million
as inventories at that date.
(6) Securities
Held-to-maturity securities are stated at amortized cost. Investments in
subsidiaries and affiliates which is not consolidated or accounted for using theequity method is 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 is 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.
Prior to April 1, 2000, the costs of consignment sales were recognized as
SUMITOMO REALTY & DEVELOPMENT CO., LTD.

23

(8) Software Cost
Software costs are amortized using the straight-line method over the estimateduseful lives (five years).
(9) 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.
(10) 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.
(11) 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.
(12) Employees’ severance and retirement benefits
The Company and some of its consolidated subsidiaries provide two types of postemployment benefit plans, unfunded lump-sum payment plans and funded noncontributory pension plans, under which all eligible employees are entitled tobenefits based on their current rate of pay, length of service, and the conditions
under which the termination occurs.
Prior to April 1, 2000, consolidated subsidiaries accrued liabilities for lumpsum severance and retirement payments equal to 40% of the amount required had
all eligible employees voluntarily terminated their employment at the balance
sheet date, except that, at March 31, 2000, one consolidated subsidiary provided
liabilities for severance and retirement benefits based on the Net-Present-Value
method. The Company and its consolidated subsidiaries ("the Companies ")recognized pension expense when, and to the extent, payments were made to thepension plans.
Effective April 1, 2000, the Companies adopted the new accounting standard("Opinion on Setting Accounting Standard for Employees’ Severance and Pension
Benefits", issued by the Business Accounting Deliberation council on June 16,1998) .
Under the new accounting standard, liabilities and expenses for severance
and retirement benefits are determined based on the amounts actuariallycalculated using certain assumptions.
The Companies provided allowance for employees’ severance and retirement
benefits at March 31, 2003, 2002 and 2001 based on the estimated amount ofprojected benefit obligation at those dates.
The excess of the projected benefit obligation over the total of the fair value ofpension assets as of April 1, 2000 and the liabilities for severance and retirement
benefits recorded as of April 1, 2000 (the "net transition obligation") amounted to¥1,681 million. All of this was recognized in expenses in the year ended March 31,
2001. Actuarial gains and losses are recognized in expenses in the succeeding
period.
As a result of the adoption of the new accounting standard, in the year ended
March 31, 2001, severance and retirement benefit expenses increased by ¥1,721
million, operating income decreased by ¥41 million and loss before income taxes
increased by ¥1,721 million compared with what would have been recorded under
the previous accounting standard.

24

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

(13) Derivative transaction and hedge accounting
The Company and its consolidated subsidiaries state derivative financial
instruments at fair value and to recognize changes in the fair value as gains orlosses 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
paid or received under the interest rate swap contract is added to or deducted fromthe interest on the assets or liabilities for which the swap contract was executed.
(14) 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.
Effective April 1, 2002, the Company adopted the new accounting standard forearnings per share (Accounting Standards Board Statement No. 2, "AccountingStandard for Earnings Per Share") .
Earnings per share for the year ended March 31, 2002 would have beenreported as follows, if this new accounting standard were applied retroactively.
For the year ended
March 31, 2002

Net income per share¥56.46(15) Reclassifications
Certain prior years amounts have been reclassified to conform to the 2003
presentation.
These changes had no impact on previously reported results of operations.

3. Changes in accounting policies
Effective April 1, 2001, the Company changed the method of recognition of revenue
and expense from the real estate business which used SPC. The old method
recorded in either Other operating income account or Other operating expense
account. The new method recorded in the Revenue from operations account.
The reason for the change is that the Company altered the Articles ofIncorporation at the general meeting of shareholders on June 28, 2001. The
Company has included investment, purchase, sales, brokerage and management of

SPC related business and J-REIT business as the Company’s core businesses.
Therefore, the Company has decided to incorporate revenues from the abovementioned new businesses in the Revenue from operations account.
As for the year ended March 31, 2002, the effect of the change increased the
Revenue from operations and Operating income by ¥3,426 million and to decrease
Other income by the same amount, therefore there was no effect on net income.

4. Cash and cash equivalents
Cash and cash equivalents at March 31, 2003 and 2002 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

2003

2002

¥101,700(6,000)3¥ 95,703¥ 87,472(9)104¥ 87,567

2003$ 846,090(49,917)25$ 796,198

5. Inventories
Inventories at March 31, 2003 and 2002, 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
Total

2003

2002

¥ 35,584
89,03933,453
3,080¥161,156¥ 23,905
74,76053,121
4,749¥156,535

2003$ 296,040
740,757
278,31125,624$1,340,732

6. Investments in and advances to unconsolidated subsidiaries and affiliates
Investments in and advances to unconsolidated subsidiaries and affiliates at March 31, 2003 and 2002, consisted of the following:Thousands of
U.S. dollars

Millions of yen

Investments in common stock, at cost
Advances
Total

2003

2002

¥ 5,673
2,476¥ 8,149¥ 5,806
4,068¥ 9,874

2003$$

47,196
20,59967,795

7. 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, 2003 and 2002, were as follows:
Thousands of
U.S. dollars

Millions of yen

Buildings and structures
Land
Machinery and equipment
Total

2003

2002

¥ 6,941
18,62882¥ 25,651¥ 7,261
18,62897¥ 25,986

2003$

57,746
154,975682$ 213,403

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

25

8. Securities
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

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

Book value

Fair market value¥ 1,095
117¥ 1,212

Thousands of U.S. dollars
DifferenceBook value

Fair market value

Difference¥ 1,103¥8$ 9,110$ 9,177$

67

117¥ 1,220

¥

—
8

973
$ 10,083

973$ 10,150$—
67(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¥ 9,2841¥ 9,285¥10,8841¥10,885¥ 1,600—¥ 1,600$ 77,238
8$ 77,246$ 90,549
8$ 90,557$ 13,311—$ 13,311

39,447857
40,304¥49,589

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

328,1787,130
335,308$412,554

249,201
5,799
255,000$345,557(78,977)(1,331)(80,308)$ (66,997)

Investments in securities were devaluated and the loss amounted to ¥4,196 million ($34,908 thousand) , 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
Thousands of
U.S. dollars

Millions of yen

MMF
Non-listed equity securities
Senior securities
Total

¥

3
3,270
42,298¥45,571$25
27,204
351,897$379,126

Senior securities included securitized properties for sale amounted to ¥27,980 million ($232,779 thousand).
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 year

¥529
—
¥529

¥ 683
600
¥1,283

¥600
—
¥600

¥—
—
¥—

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

Over 10 year

1 year or less

Bonds
Other
Total

$4,401—$4,401$ 5,682
4,992$10,674$4,992—$4,992$——$—

D. Total sales of Available-for-sale securities sold in the year ended March 31, 2003 amounted to ¥644 million ($5,358 thousand) and the related losses amounted to ¥500
million ($4,160 thousand) , respectively.
E. The Securitized properties for sale are the equity investments such as Preferred Subscription Certificates and Tokumei Kumiai (Partnership) Investments in Special
Purpose Companies (SPC) and Tokumei Kumiai which own and develop real estates. The Company or its subsidiaries will sell those real estates 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.
Securitized properties for sale consisted of the Preferred Subscription Certificates issued by SPC as of March 31, 2003.

26

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

For 2002
A. The following tables summarize acquisition costs, book values and fair market values of securities with available fair market values as of March 31, 2002:(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¥1,169¥1,188¥19

10¥1,17910¥1,198—¥19(b) Available-for-sale securities:

Millions of yen
Acquisition cost

Book value

Difference¥11,2871¥11,288¥14,2561¥14,257¥ 2,969—¥ 2,969

31,895
1,328
33,223¥44,51125,6591,247
26,906¥41,163(6,236)(81)(6,317)¥ (3,348)

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 ¥3,724 million, consisted of equity securities included Available-for-sale securities amounted to¥3,559 million and others amounted to ¥165 million.
B. The following table summarizes book values of securities with no available fair market values as of March 31, 2002:
Available-for-sale securities:

Book value
Millions of yen

MMF
Non-listed equity securities
Senior securities
Total

¥

104
968
23,033¥24,105

Senior securities included securitized properties for sale amounted to ¥21,915 million.
C. Available-for-sale securities with maturities and held-to-maturity securities at March 31,2002, mature as follows:
Millions of yen

Bonds
Other
Total

1 year or less

1 to 5 years

5 to 10 years

Over 10 year

¥203
—
¥203

¥ 976
737
¥1,713

¥600
—
¥600

¥—
—
¥—

D. Total sales of Available-for-sale securities sold in the year ended March 31, 2002 amounted to ¥596 million and the related gains and losses amounted to ¥241 million and¥172 million, respectively.
E. The Securitized properties for sale are the equity investments such as Preferred Subscription Certificates and Tokumei Kumiai (Partnership) Investments in Special
Purpose Companies (SPC) and Tokumei Kumiai which own and develop real estates. The Company or its subsidiaries will sell those real estates 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.
In the year ended March 31, 2002, the Company reclassified the preferred subscription certificates of ¥12, 803 million from Investment in securities account to Securitizedproperties for sale account.

9. Short-term debt and long-term debt
Short-term debt at March 31, 2003 and 2002 consisted of the following :Millions of yen
2003

Loans, principally from banks
Commercial paper¥228,751
64,100¥292,851

Averageinterest rate (%)

0.96
0.82

Thousands of U.S. dollars
2002¥247,557
63,900¥311,457

Averageinterest rate (%)

1.00
1.14

2003

$1,903,086
533,278$2,436,364

The interest rates represent weighted-average rates in effect at March 31, 2003 and 2002, regardless of borrowing currencies, though the range of the interest rate varies byborrowing currency.

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

27

Long-term debt at March 31, 2003 and 2002, consisted of the following:Thousands of
U.S. dollars

Millions of yen

3.15% Euroyen notes (*) , due 2002
2.35% Euroyen notes, due 2002
2.65% Euroyen notes, due 2004
2.4% Euroyen notes, due 2003
2.575% Euroyen notes, due 2004
2.5% domestic straight bonds, due 2003
2.025% domestic straight bonds, due 2002
Floating rate Euruoyen notes, due 2002
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
2.35% domestic straight bonds, due 2002
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
1.35% domestic straight bonds, due 2006
0.75%—0.80% Euroyen notes, due 2003
0.8%—1.2% Euroyen notes, due 2005
Loans, principally from banks and insurance companies,
interest principally at rates of 0.82% to 4.35% in 2003,
and 0.82% to 4.66% in 2002:
SecuredUnsecured
Subtotal
Amount due within one year
Total(*) Euroyen notes = yen dominated bonds issued in Euro market

28

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

2003

2002

¥

—
—
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
1,700
5,000

¥ 9,400
10,000
9,300
9,400
7,500
13,70019,000
1,000
1,000
5,200
3,900
8,700
700
10,00033,90230,0009,820
37,1009,510
20,0009,770
17,024
4,400
4,200
9,698
10,00010,00010,0007,360
10,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—

$

2003

—
483,427
845,267(217,862)¥627,405

1,981
532,838
876,403(272,599)¥603,804—
4,021,856
7,032,172(1,812,496)$5,219,676——
77,371—
61,564
108,153——
8,319
41,597
26,62259,068
5,824
78,203
278,544—
80,441
286,53179,010163,062
77,546
129,501
29,78427,454
63,27879,03565,25864,31061,231
63,161
83,19564,95880,57478,261
78,25359,45999,834
83,19583,19583,195
103,993
41,597
14,143
41,597

The aggregate annual maturities of long-term debt at March 31, 2003, are as follows:Year ending March 31

Millions of yen

2004
2005
2006
2007
2008
2009 and thereafter
Total¥217,862
186,318
194,738
151,894
66,30428,151¥845,267

Thousands of
U.S. dollars$1,812,496
1,550,067
1,620,117
1,263,677
551,614234,201$7,032,172

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 withthem 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.

10. Employees’ severance and retirement benefits
As explained in Note 2 (12) , effective April 1, 2000, the Companies adopted the
new accounting standard for employees’ severance and retirement benefits, underwhich the liabilities and expenses for severance and retirement benefits are
determined based on the amounts obtained by actuarial calculations.

The liabilities for severance and retirement benefits included in the liability
section of the consolidated balance sheets as of March 31, 2003 and 2002
consisted of the following:Thousands of
U.S. dollars

Millions of yen

Projected benefit obligation
Unrecognized actuarial differences
Fair value of plan assets
Liability for severance and retirement benefits

2003

2002

2003

¥6,720(351)(2,059)¥4,310¥6,276(431)(2,102)¥3,743$55,907(2,920)(17,130)$35,857

Included in the consolidated statements of operations for the years ended March 31, 2003 and 2002 are severance and retirement benefit expenses comprised of thefollowing:Thousands of
U.S. dollars

Millions of yen
2003

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 rate and the rate of expected return on plan assets for both years
ended March 31, 2003 and 2002 used by the Company are 2.5% (the discountrates used by one consolidated subsidiary is 1.5% and 2.0%, respectively) . The
estimated amount of all retirement benefits to be paid at the future retirement date

¥450
141
(51)
431
¥971

2002

2003

¥444
154
(61)
145
¥682

$3,744
1,173
(424)
3,585
$8,078is 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.

11. Loss on sale and devaluation of property and equipment
In order to prepare for the introduction of the new accounting standard,"Impairment of long-lived assets" to be applicable in FY2006, the Company and its
subsidiaries sold and recognized losses on a part of long-lived assets of ¥48,666
million ($404,875 thousand) to be subject to the new accounting standard. Someof the long-lived assets were sold to its consolidated subsidiaries and such losses
incurred in these transactions were not eliminated in consolidation and wererecorded as net loss on devaluation of land or buildings. Loss on sale anddevaluation of property and equipment of ¥48,666 million ($404,875 thousand)consists of net loss on sale of land of ¥15,266 million ($127,004 thousand) , loss
on devaluation of land of ¥25,167 million ($209,376 thousand) , net loss of sale ofbuildings of ¥8,125 million ($67,596 thousand) and loss on devaluation ofbuildings of ¥108 million ($899 thousand).

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

29

12. 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, 2003 and 2002.

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

Statutory tax rate
Net operating loss carryforwards of subsidiaries
Operating losses 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

42.05%(39.11)(58.42)
19.54(7.53)
37.27(68.90)(7.49)
29.44(2.05)(55.20)%The difference between the statutory tax rate and the Company’s effective tax rate for financial statement purposes for the year ended March 31, 2002 was not significant.
Therefore the breakdown of the differences of such tax rates is not disclosed.
Details of deferred tax assets and liabilities at March 31, 2003 and 2002 were as follows:
Thousands of
U.S. dollars

Millions of yen
2003

2002

2003

Deferred tax assets:
Net operating loss carryforwards
Loss from devaluation of inventories
Unrealized inter-company profits
Net realized holding losses on securities
Other
Subtotal of deferred tax assets
Valuation allowance
Total deferred tax assets¥23,133
5,758
1,564
3,146
7,866
41,467(12,028)
29,439¥24,398
6,612
3,937
1,515
4,927
41,389(15,583)
25,806$192,454
47,90313,012
26,17365,441
344,983(100,066)
244,917

Deferred tax liabilities:
Net unrealized holding gains on securities
Other

(—)
(7)

(47)
(19)

(—)
(58)

(7)

(66)

(58)

¥29,432¥25,740$244,859

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, 2003, theCompany and consolidated domestic subsidiaries applied the reduced aggregate
statutory income tax rate of 40.69 % for calculating deferred tax assets andliabilities that are expected to be recovered or settled in the years commencing on

30

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

April 1, 2004 or later. As a result, deferred taxes assets decreased by ¥ 502 million($ 4,176 thousand) and provision for deferred income taxes increased by ¥ 397
million ($ 3,303 thousand) and net unrealized holding losses on securities
decreased by ¥ 105 million ($ 873 thousand) compared with what would bereported using the currently applicable tax rate of 42.05 %.

13. Guarantee and deposits received
Guarantee and deposits received at March 31, 2003 and 2002, were as follows:
Millions of yen

Long-term deposits due within one year
Interest-bearing
Guarantee and lease deposits from tenants
Non-interest-bearing
Interest-bearing
Long-term deposits
Non-interest-bearing
Interest-bearing
Total

Thousands of U.S. dollars

2003

Averageinterest rate (%)

2002

Averageinterest rate (%)¥ 6,164

0.98¥ 19,991

1.87$¥156,098
22,500—2.80¥163,178
22,500—2.80$1,298,652
187,188

164,764
26,000¥369,362—
0.86

166,573
20,000¥372,251—0.91

1,370,749
216,306$3,072,895

2003

51,281

The aggregate annual maturities of interest-bearing guarantee and deposits received at March 31, 2003, are as follows:Year ending March 31

Millions of yen

2004
2005
2006
2007
2008

¥ 6,164—
22,50020,0006,000¥54,664

Thousands of
U.S. dollars$ 51,281—
187,188
166,389
49,917$454,775

14. 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.
Effective October 1, 2001, the Commercial Code provides that an amountequal to at least 10% of cash dividends and other cash appropriations shall beappropriated and set aside as a legal earnings reserve until the total amount oflegal earnings reserve and additional paid-in capital equals 25% of common stock.
The total amount of legal earnings reserve and additional paid-in capital of theCompany has been reached to 25% of common 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 being equal to or exceeding 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.

15. 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 was as follows.
As Lessee
A summary of assumed amounts (inclusive of interest) of acquisition cost, accumulated depreciation and net book value at March 31, 2003 and 2002 were as follows:
Thousands of
U.S. dollars

Millions of yen
2003

Acquisition cost:
Buildings and structures
Other
Accumulated depreciation
Net book value¥13,913
1,991(3,338)¥12,566

2002¥9,8651,441(2,020)¥9,286

2003$115,748
16,564(27,770)$104,542

Depreciation equivalent of ¥1,784 million ($14,842 thousand) and ¥1,012 million for 2003 and 2002, respectively, are computed using the straight-line method over the leaseterms assuming no residual value or residual indemnity.
SUMITOMO REALTY & DEVELOPMENT CO., LTD.

31

Lease expenses under finance leases, inclusive of interest, for the years ended March 31, 2003 and 2002, amounted to ¥1,784 million ($14,842 thousand) and ¥1,012 million,
respectively.
Future lease payments and receipts under such finance leases and non-cancelable operating leases at March 31, 2003 and 2002, were as follows:
Thousands of
U.S. dollars

Millions of yen

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

2003

2002

¥ 2,312
10,254¥ 12,566¥ 1,698
7,588¥ 9,286

19,23485,308$ 104,542

¥

¥

$

¥

¥

1
—
1

$

8
—
8

$

¥ 10,215
116,388¥126,603¥ 4,91054,964¥59,874$

84,984
968,286$1,053,270

¥

¥

$

¥

82
685
767

¥

7
1
8

$

49
42
91

¥

18
7
25

¥

2003

¥

89
922
¥ 1,011

$

$

150
58
208

682
5,699
6,381

16. 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.
Forward foreign currency and interest rate swap contracts are subject to risks
of foreign exchange rate changes and interest rate changes, respectively. 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 contracts

Hedged items:
Foreign currency monetary liabilities and foreign
provisional transaction
Interest rate swap contracts Bank loan, 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, 2003 and 2002 is omitted as special hedge accounting has been applied toderivative transactions of interest rate swap contracts. Also, evaluating hedge
effectiveness of foreign exchange at years ended March 31, 2003 and 2002 isomitted because significant terms of hedging instruments and those of the items
hedged are the same and the risk of changes in foreign exchange rates would beentirely eliminated.
The contract amounts and unrealized gain or loss of outstanding derivativetransactions at March 31, 2003 and 2002 were not disclosed because all derivativetransactions were used as hedges and hedge accounting was applied.

17. 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.
Information by industry segments for the years ended March 31, 2003, 2002 and 2001 is summarized as follows:
32

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

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

¥

¥

Total

7,430
3,862
11,292
10,621
671¥

106,621
80
174

¥

¥

Elimination
and/or corporate

533,915
16,142550,057
455,554
94,503¥

1,891,228
11,694
48,839¥¥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

Otherbusiness

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

¥

¥

¥

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¥

Millions of yen

For 2001
I Net sales and operating income
Net sales
Customers
Intersegment
Total
Costs and expenses
Operating income

Leasingbusiness¥¥

163,047
1,528
164,575
118,137
46,438

Sales
business¥ 149,196—
149,196
129,502¥ 19,694

II Identifiable assets, depreciation expense and capital expenditures
Identifiable assets¥ 1,415,770¥ 152,264
Depreciation expense
9,707
51
Capital expenditures
45,721
515

Construction
business¥¥¥

Brokeragebusiness

104,549
9,000
113,549
109,533
4,016¥ 34,702
179
34,881
26,160¥ 8,721

25,266187
334¥ 27,200
178
732

Other
business

¥

¥

¥

7,751
6,461
14,212
8,865
5,347

115,332
85
125

Total

¥

¥

¥

459,245
17,168476,413392,197
84,216

1,735,832
10,20847,427

Elimination
and/or corporate

¥

¥

¥

Consolidated— ¥(17,168)(17,168)(8,170)(8,998) ¥459,245—459,245
384,027
75,218167,697169
454

1,903,529
10,37747,881¥Thousands of U.S. dollars

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

Leasingbusiness

Salesbusiness

1,590,807
14,676
1,605,483
1,162,380
443,103$ 1,528,528
133
1,528,661
1,314,127$ 214,534

II Identifiable assets, depreciation expense and capital expenditures
Identifiable assets$ 12,626,065$ 1,755,957
Depreciation expense
92,463782
Capital expenditures
395,973
2,987

Construction
business

Brokeragebusiness

950,133
85,341
1,035,474
977,304$ 58,170$ 310,607
2,013
312,620
247,795$ 64,825$$ 286,622
2,063
2,155

$

178,336
1,314
3,752

Other
business

$

$

$

Total

61,81432,13093,94488,361
5,583$

887,030666
1,448$ 15,734,010
97,288406,315$

4,441,889
134,293
4,576,182
3,789,967
786,215

Elimination
and/or corporate$

Consolidated— $(134,293)(134,293)(84,451)$ (49,842) $$ 1,035,266
2,321
6,697

4,441,889—
4,441,889
3,705,516
736,373$ 16,769,276
99,609413,012In the year ended March 31, 2002, the Company changed the method of recognition of revenue and expense from the real estate business which used SPC as stated in Note 3, "Changes
in accounting policies ". Also, as described in Note 8, the Company transferred certain investment in securities to securitized properties for sale on April 1, 2001.
SUMITOMO REALTY & DEVELOPMENT CO., LTD.

33

The effects of these changes on operating income and identifiable assets at and for the year ended March 31, 2002, were as follows:
Millions of yen
Operating income
Identifiable assets

Leasing business
Sales businessElimination and/or corporate¥3,426——¥44,221
22,102(66,323)

In the year ended March 31, 2001, several changes were made affecting segment
disclosures as follows :A. From the year ended March 31, 2001, Loans business segment is included in
Other business segment as the segment accounted for less than 10% of all
segments in net sales, operating income and identifiable assets.
Information on Loans business segment for the year ended March 31,
2001, is summarized as follows:
Millions of yen
Loansbusiness

I Net sales
Customers
Intersegment
Total
Costs and expenses
Operating income
II Identifiable assets
Depreciation expense
Capital expenditures¥1,784
5,009
6,793
1,750
¥5,043

B. As described in Note 2 (5) to the Consolidated Financial Statements, from theyear ended March 31, 2001, one domestic consolidated subsidiary introduced
cost accounting system.
The effect of this adoption on operating income for the year ended March
31, 2001, was as follows:
Millions of yen

Sales business
Brokerage business

¥624
341

C. As described in Note 2 (12) to the Consolidated Financial Statements, from theyear ended March 31, 2001, the Company and its consolidated subsidiaries
adopted the new accounting standard for severance and retirement benefits.
The effect of this adoption on operating income for the year ended March
31, 2001, was as follows:
Millions of yen

Leasing business
Construction business
Other businessElimination and/or corporate

¥(15)
(18)
(3)
3

¥112,193
727

18. Contingent liabilities
At March 31, 2003, the Company and its consolidated subsidiaries were contingently liable as guarantors of borrowings by affiliates and others as follows:
Millions of yen

Affiliates
Other
Total

¥1,532206¥1,738

Thousands of
U.S. dollars$12,745
1,714$14,459

Also, at March 31, 2003, the Company and its consolidated subsidiaries had outstanding commitments to guarantee loans of certain affiliates and others. Certain
information of them was as follows:
Millions of yen

Affiliates
Other
Total
(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 in 1994
(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

¥—
10
¥ 10

Thousands of
U.S. dollars

$—
83
$ 83

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 A, 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 B, 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 of
2000.

19. Subsequent events
The Company issued 1.5 % ¥10,000 million ($83,195 million) domestic straightbonds due 2007 on April 16, 2003, 1.5% ¥10,000 million ($83,195 million)
domestic straight bonds due 2007 on April 25, 2003, 1.39% ¥7,000 million($58,236 million) domestic straight bonds due 2006 on May 21, 2003, 1.4%
¥20,000 million ($166,389 million) domestic straight bonds due 2007 on June 26,
34

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

2003, and 1.4% ¥10,000 million ($83,195 million) domestic straight bonds due
2007 on June 26, 2003.
On June 27, 2003, the shareholders of the Company approved payments of ayear-end cash dividend of ¥6 ($0.05) per share or a total ¥2,440 million ($20,300
thousand) to shareholders of record at March 31, 2003.

Report of Independent Public Accountants

To 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. (a Japanese corporation) and subsidiaries as ofMarch 31, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended
March 31, 2003, expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is toexpress 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, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three
years in the period ended March 31, 2003, in conformity with accounting principles generally accepted in Japan as described in Note 1 to the consolidated financial
statements.
Without qualifying our opinion, we draw attention to the following. As explained in Note 2, Sumitomo Realty & Development Co., Ltd. and subsidiaries adopted, on aprospective basis in all cases, new Japanese accounting standards for financial instruments, employees’ severance and retirement benefits and foreign currencytranslation effective April 1, 2000. Also, as explained in Note 3, Sumitomo Realty & Development Co., Ltd. changed the method of recognition of revenue andexpense from the real estate business which used SPC, effective April 1, 2001.
The consolidated financial statements as of and for the year ended March 31, 2003 have been translated into United States dollars solely for the convenience of thereader. We have recomputed the translation and, in our opinion, the consolidated financial statements expressed in Japanese yen have been translated into UnitedStates dollars on the basis set forth in Note 1 to the consolidated financial statements.

Tokyo, Japan
June 27, 2003

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

35

Board of Directors and Auditors

Corporate Data

(As of June 27, 2003)(As of March 31, 2003)

Chairman of the Board
Shinichiro Takagi

Sumitomo Realty & Development Co., Ltd.

President
Junji Takashima
Director and Advisor
Taro Ando
Senior Managing Directors
Hirohisa Ichikawa
Yoichi Nakamura
Tetsuro Tsuruta
Hisao Matsui
Masayoshi Ohashi
Managing Directors
Mitsuru Mori
Sadao Ushimaru
Kazuo Masuoka
Kenichi Onodera
Shozo Suzuki
Directors
Kenichiro Sugimoto
Akira Kanda
Haruo Fukumuro
Kenichi Kameyama
Yozo Akiyama
Yasushi Kinoshita
Satoru Miyashita
Tsutomu Oyama
Hiroyuki Asano
Yoshifumi Nakamura
Statutory Auditors
Shinsaku Sanmoto
Ryoichi Nomura
Tadashi Kitamura
Kunio Kobayashi

36

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

Head Office
Shinjuku NS Building
4-1, Nishi-Shinjuku 2-chome
Shinjuku-ku, Tokyo 163-0820, Japan
Phone: 03-3346-2342
Facsimile: 03-3346-1652
http://www.sumitomo-rd.co.jp
Date of Establishment
December 1, 1949
Paid-in Capital¥86,787 million
Common Stock Issued and Outstanding
407,085,978
Number of Shareholders
32,147
Number of Employees
6,404
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

Share Price and Trading Volume on Tokyo Stock Exchange(As of July 31, 2003)¥1,2001,800

Share price (left scale)¥1,000

1,600

¥800

1,400

¥600

1,200

TOPIX average (right scale)

¥400

1,000

¥200

800

¥0

600

140
120
100
80
60
40

Trading volume (million shares)

20
0

1997

1998

1999

2000

2001

2002

2003

SUMITOMO REALTY & DEVELOPMENT CO., LTD.

37

Shinjuku NS Building, 4-1, Nishi-Shinjuku 2-chome
Shinjuku-ku, Tokyo 163-0820, Japan
Phone: 03-3346-2342 Facsimile: 03-3346-1652
http://www.sumitomo-rd.co.jp

Printed in Japan