AWinning
Combination
Growth Potential & Balanced Portfolio
Annual Report 2005

Consolidated
Financial
Highlights
Sumitomo Realty & Development Co., Ltd. and its consolidated subsidiaries
Years ended March 31

Thousands of U.S. dollars1

Millions of yen

2005

2004

2003

2005

Revenue from Operations¥616,115¥573,862¥533,915$5,740,915

Operating Income

100,291

95,97788,512

934,504

Ordinary Profit

74,39365,97656,760693,189

Net Income

15,548

6,320

4,974

144,875¥2,136,329¥2,090,970¥2,015,667$19,906,159

320,098

303,875

211,8212,982,650

1,038,389

1,048,629

1,138,119

9,675,634¥ 32.64¥ 15.34¥ 12.22$0.30

673.40639.01520.84

6.27

9.00

9.00

6.00

0.08

9.2

9.4

11.6

2.92

3.01

4.89

For the YearAt Year-End
Total Assets,

Total Shareholders Equity
Interest-Bearing Debt
Per Share Data (Yen and Dollars)
Net Income,

Shareholders Equity
Cash Dividend Applicable to the Year
Key Ratios (Times)
ND/OP Ratio2
ND/E Ratio

3

Notes: 1. U.S. dollar amounts in this report are translated, for convenience only, at the rate of ¥107.32 = US$1, the approximate exchange rate as of March 31, 2005.
2. ND/OP Ratio = Net interest-bearing debt (interest-bearing debt – cash, time and notice deposits) / (Operating income + Interest income and dividend income),
3. ND/E Ratio = Net interest-bearing debt (interest-bearing debt – cash, time and notice deposits) / Shareholders equity

Revenue from Operations

Operating Income

Ordinary Profit(Billions of yen)(Billions of yen)(Billions of yen)

616.1

650.0

107.0
96.0

100

573.9

600

100.3

(Billions of yen)
80.0

80

74.4

459.2

80 75.2

80.4

60

23.0

56.8
15.5

47.1

400
60

30.0

30

66.0

88.5

533.9
497.9

Net Income (Loss)

15

40 38.5
5.0

40
200

20

6.3

0

20

–15

0

2001 2002 2003 2004 2005 2006

(Forecast)002001 2002 2003 2004 2005 2006

(Forecast)2001 2002 2003 2004 2005 2006

(Forecast)–18.0
2001 2002 2003 2004 2005 2006

(Forecast)1

At a Glance

Sales

Leasing
Revenue from Operations(Billions of yen)
250
164.6

35.2%

178.0

193.0 202.8

Revenue from Operations

213.3
149.2

35.7%

170.4

224.2

0

2001 2002 2003 2004 2005 2006

2001 2002 2003 2004 2005 2006
(Forecast)(Forecast)

Operating Income
60
46.4

49.2

53.3

(Billions of yen)
59.0
52.7 55.9

Operating Income(Billions of yen)
32.3
30

29.0%

40

50.1%
20

0

20

24.4

32.4

32.5

25.8

19.7

10

0

2001 2002 2003 2004 2005 2006

2001 2002 2003 2004 2005 2006
(Forecast)(Forecast)

OFFICE BUILDING, CONDOMINIUM, AND OTHER
PROPERTY LEASING AND MANAGEMENT AND
RELATED ACTIVITIES

MID- AND HIGH-RISE CONDOMINIUM, DETACHEDHOUSE, AND HOUSING LOT DEVELOPMENT AND
SALES AND RELATED ACTIVITIESWithin the leasing business, the Urban Property

The Urban Property Development Division is responsible

Management Division is responsible for the leasing

for the development and sale of condominiums, officeof office buildings and luxury condominiums. Also,buildings for sale, detached houses, and housing lots

the division conducts leasing operations that utilize

and related activities. It is also engaged in sales activities

special purpose companies (SPCs). The Urban Property

with Sumitomo Real Estate Sales Co., Ltd., while theDevelopment Division handles the acquisition andmanagement of condominiums after completion is thedevelopment of land for the leasing business. In addition,

responsibility of the Urban Management Division of

Sumitomo Realty masterleases almost all of the property

Sumitomo Realty and Sumitomo Fudosan Tatemono Service

holdings owned by SPCs and other Group companies

Co., Ltd.

and operates a sublease business. Sumitomo Fudosan
Tatemono Service Co., Ltd., manages the office buildings
and luxury condominiums leased by Sumitomo Realty.

Note: Figures in the graphs on pages 2 and 3 include intersegment transactions.

2

237.0

183.7

125

125

0

(Billions of yen)250

221.2 222.0

Brokerage

Construction
Revenue from Operations(Billions of yen)

20.3%

Revenue from Operations

6.9%

144.0

150
113.5 115.3

124.5 125.1 127.4(Billions of yen)
50
34.9

36.2

37.6

39.8

43.4

47.0

100
25
50

0

0
2001 2002 2003 2004 2005 2006

2001 2002 2003 2004 2005 2006
(Forecast)(Forecast)

Operating Income

7.6%(Billions of yen)
10.0

10
8.2

Operating Income

12.1%

8.4

(Billions of yen)
14.5
13.5

15

7.0
10
5

4.0

4.8

8.7

8.0

7.8

8.5

5

0

0
2001 2002 2003 2004 2005 2006

2001 2002 2003 2004 2005 2006
(Forecast)(Forecast)

DETACHED HOUSE CONSTRUCTION AND
REMODELING AND RELATED ACTIVITIESBROKERAGE AND SALES ON CONSIGNMENTOF REAL ESTATE AND RELATED ACTIVITIES,Sumitomo Realty s Housing Business Division works on the,
Company s full remodeling package Shinchiku Sokkurisan

Sumitomo Real Estate Sales Co., Ltd., serves as an

and the construction of new detached houses. The Housing

engaged in newly built residential property sales agency

Business Division and Sumitomo Fudosan Syscon Co., Ltd.,

services.

intermediary in the purchase and sale of real estate and isare engaged in house renovations. Sumitomo Fudosan
Tatemono Service Co., Ltd., is in charge of condominium
refurbishment. Universal Home Inc. is a franchiser
specializing in standardized houses using conventional
construction methods.

3

A Message fromAchieving Sustained GrowthBalanced Operations
Our achievement of sustained growth has been the result of ourwell-balanced operations. We have a balanced portfolio in four
operational fields—leasing, sales, construction, and brokerage—that have different risk profiles and capital requirements. As the,market environment has changed, the Company s growth has
been led by the particular business field that best matches theoperating conditions during each period.

In fiscal 2005, ended March 31, 2005, Sumitomo Realty
continued to make solid progress. We recorded a 7.4% increase
in revenue from operations, to ¥616.1 billion, and a 4.5% gain
in operating income, to ¥100.3 billion. Net income was up
146.0%, to ¥15.5 billion.
Growth Potential,,
Sumitomo Realty s greatest strength is the Company s growthpotential. We recorded continued growth through the successful
implementation of our previous two management plans—the FourYear Business Reconstruction Plan, which started in April 1997,
and the New Three-Year Growth Plan, which began in April
2001. To achieve further growth, we formulated the Top Gear
Growth Three-Year Plan, which began in the year under review.
Under the Top Gear Growth Three-Year Plan, we will continue
to follow an aggressive course of expansion. Specifically, forfiscal 2007, the final year of the plan, we are targeting revenue
from operations of ¥700 billion, an increase of ¥126 billion fromthe year ended March 2004; operating income of ¥115 billion,up ¥19 billion; and ordinary profit of ¥85 billion, up ¥19 billion.

Leasing and sales are our traditional main fields of business.
These are capital-intensive fields where returns and risk are both
high and where substantial upfront investment is required. In
contrast, our construction and brokerage operations, which areorder-based businesses with low capital requirements and nosales risk, have been developed more recently.
Under the Top Gear Growth Three-Year Plan, we will work
to further improve the balance of our operational fields byincreasing the share of profits from construction and brokerage.
Specifically, we will increase the percentage of our ordinary
profit contributed by these operations to one-third.
Enhancing Our Financial Position
Balanced finances will also play an important role in our ability
to achieve sustained growth. Accordingly, one of the Top Gear,
Growth Three-Year Plan s key objectives is the strengthening of
our financial position. Specifically, the plan calls for reducing theratio of net interest-bearing debt, or the total of loans, corporate
bonds, and notes less cash, time and notice deposits, tooperating income to less than eight times and the ratio of net,
interest-bearing debt to shareholders equity to less than threetimes. We will work within these fiscal constraints as we strive toachieve our growth targets.

As shown in the following table, in fiscal 2005 we made a,
successful start in the plan s initial year, and we are on course to,achieve the plan s final objectives.

(Millions of yen)
Fiscal Year

Revenue from Operations
Operating Income
Ordinary Profit

4

2004

2005

2006

2007

(Actual)(Actual)(Forecast)(Planned)¥573,862
95,97765,976¥616,115
100,291
74,393¥650,000
107,000
80,000¥700,000
115,000
85,000the President
Medium-Term Management Plans
700(Billions of yen)
574

600
Revenue from Operations
400

459

339

200

0
1997

1998

1999

2000

2001

Four-Year Business Reconstruction Plan

2002

2003

2004

2005

New Three-Year Growth Plan

2006
(Forecast)

2007(Planned)

Top Gear Growth Three-Year Plan
115

96

100

85

Operating Income
Ordinary Profit

75
66

43

50

39

3
0
1997

1998

1999

2000

2001

Preparing for Future Growth
In addition to implementing the plan, we must prepare for
ongoing expansion after the plan is completed. Leasing andsales, which account for about 85% of our operating income,are capital-intensive businesses in which several years are
required from the acquisition of land to the completion andopening of a building. In these operations, the acquisition ofsites with strong potential is vitally important.
Recently, however, competition in site acquisition has
intensified. In addition to developers such as Sumitomo Realty,
there have been many new participants in REITs and real estate
funds. In response, we are drawing on the site acquisition knowhow that we have cultivated over many years to move forward
steadily and take advantage of available business opportunities.
Continued Growth in Revenue and Profits
In the fiscal year ending March 2006, while strengthening
our financial position, we will strive to extend our record ofincreased revenue and profits and will continue to prepare for
future growth and to reinforce our efforts to enhance corporate
value.

2002

2003

2004

2005

2006
(Forecast)

2007(Planned)

The following year, ending March 2007, will be the final yearof the Top Gear Growth Three-Year Plan. We will endeavor toachieve our 10th consecutive year of meeting our planned
objectives, our 10th consecutive year of increased revenue andprofits, and our 7th consecutive year of record high ordinary
profit. Over the 10-year period covered by the three plans,
our revenue from operations is projected to double, operating
income to increase about three times, ordinary profit to increaseabout 30 times, and interest-bearing debt to be reduced from
¥1.6 trillion to ¥1 trillion. Everyone at Sumitomo Realty will dotheir utmost to achieve these objectives and extend the,Company s record of success.
We are ready to face the challenges that lie ahead, and I would
like to ask for your continued support as we move forward toachieve sustained growth.
July 2005

Junji Takashima
President
5Corporate
Governance
Sumitomo Realty is committed to effective corporate governance and believes that soundmanagement requires sharing information on a Companywide basis, ensuring that everyone isaware of problems, enhancing internal management supervision, and achieving highly transparent
management through appropriate information disclosure. We have taken a number of steps to
implement these practices efficiently.
In addition to meetings of the board of directors, the Senior Managing Executive Officers
Committee meets on a periodic basis to discuss important issues and make decisions rapidly andappropriately. Regular meetings are also held by the Executive Officers Committee. In addition to
management policies and issues, work site issues and improvement plans are also discussed at thesemeetings.
To enhance management supervision and external auditing, we established the Inspection
Department, which audits the operational execution of all divisions in the Group as well as internal
control. The department works to prevent misconduct and mistakes and to support the auditingof statutory auditors. We also receive advice from attorneys as needed. We have four statutory
auditors, of whom two are outside auditors.
,
At the board of directors meeting held on May 19, 2005, the Inspection Department and the Legal
Documents Section of the General Affairs Department were integrated to create the Legal Affairs
Department. This department will work to further enhance internal auditing, respond flexibly tochanges in laws and regulations, and implement more-robust internal control.
To further enhance our compliance with laws and regulations and to ensure ethical businesspractices, we established the Compliance Promotion Committee, which is led by the president. In
addition, the General Affairs Department distributes to all Group employees a compliance pamphletthat provides information on such matters as resolving work site legal issues and preventing
compliance-related problems.
In accordance with the Commercial Code and the Securities Transaction Law, the Company,
has concluded an auditing contract with KPMG AZSA & Co. for the auditing of the Company s
accounts. There are no conflicts of interest between Sumitomo Realty and the independent auditor.
At the ordinary general meeting of shareholders held in June 2004, we introduced a new
performance-based compensation system for directors. Under this system, the annual compensation,
for directors is based on the Company s performance, with total compensation set at 1% of consolidated ordinary profit. The new system combines the three elements that made up the previous
system—monthly compensation, annual bonuses, and retirement allowances.

6

AWinning
Combination

GrowthPotential&
Balanced
Portfolio
7

A Winning Combination

Growth Potential

Progress in New Development
Gross floor area (Thousand m2)

Total increase of approximately
1.9 million m2 from FY1998 to FY2010

2,000

+570
(13 buildings)+420(10 buildings)

1,000
+640
(17 buildings)+280(10 buildings)
0
FY19982001

Four-Year Business
Reconstruction Plan

8

2004

FY2002

New Three-Year
Growth Plan

FY2005Top Gear GrowthThree-Year Plan2007

FY2008

Next Three-YearManagement Plan

2010

,
Sumitomo Realty s outstanding portfolio of office buildings is a key source of the,,Company s growth potential. The total floor area of the Company s portfolio isincreasing, and the Company has a large number of projects under development.
In addition, the portfolio includes many prime properties that are highly
competitive.

Growing Demand for Prime Properties
In the central Tokyo office building market, there is strong demand for buildings that meet the criteria
for prime properties. These buildings are close to stations, are new and feature modern amenities,
and offer large areas on each floor. On the other hand, even if rents are reduced it is difficult to findtenants for buildings that are far from stations, old, or small. For example, as the revolution in
information technology continues, office building tenants require more advanced support facilities.
Accordingly, buildings without advanced IT support or earthquake protection are rapidly becoming
less competitive. These trends are having a significant effect in the Tokyo office building market,,
where about 30% of the buildings in the city s 23 wards are more than 30 years old and therefore
have limited earthquake resistance. These structural changes in demand are accelerating, andSumitomo Realty is well positioned to meet emerging tenant needs.

Akasaka 4-chome Project,
Sumitomo Realty s Strong Portfolio
Our portfolio is heavily weighted in central Tokyo and has an average age of 13 years, the lowest,
among Japan s major real estate companies. Our gross floor area will increase to 3.3 million square
meters by March 2007 and a further 17%, to 3.9 million square meters, by March 2010. Because ourbuildings are newer, they require less refurbishment, allowing us to invest more of our resources in
new construction.

Kanda Project,
All of the Company s buildings completed since 1997 offer quake-resistant structures and separate
climate control systems for each suite as well as reinforced floors for heavy loads, high-capacity
electrical systems, high ceilings, and many other features sought by tenants. The many recently
constructed buildings in our highly competitive portfolio are the foundation of our strong growthpotential, and in the years ahead we will draw on that potential to record continued businessexpansion.

Ongoing Improvement Measures
To build a stronger management foundation, the Company is following a strategy of continually
improving its portfolio, selling buildings while they still retain a certain degree of competitivenessand adding new, highly competitive buildings. The decision to dispose of a building is based oncomprehensive consideration of such factors as location, scale, and returns. In this way, we willcontinue to enhance our portfolio with buildings that meet all of the criteria for prime properties.

Mita Project

Major Development Projects (Fiscal Years 2006 and 2007)
Project

Location(Tokyo)Gross Floor
Area (m2)Expected
Completion

Akasaka 4-chome Project (SPC)

Minato Ward

19,700

Sept. 05

Kojimachi 2-chome Project (SPC)

Chiyoda Ward

4,000

June 06

Kanda Project (SPC)

Chiyoda Ward

28,800June 06

Kudanshita Project (SPC)

Chiyoda Ward

17,500June 06

Shibuya 1-chome Project

Shibuya Ward

9,600

July 06

Shibaura Project (SPC)

Minato Ward

34,700Aug. 06

Mita Project (SPC)

Minato Ward

99,200

Sept. 06

9

A Winning Combination

Balanced Portfolio

Sumitomo Realty,s Balanced Portfolio

High level of capital, low level of human resources

CapitalLeasing

Relatively high level of capital, relatively low level of human resources
Sales

Relatively low level of capital, relatively high level of human resources
Construction

Low level of capital, high level of human resources
Brokerage

Human Resources10,
Sumitomo Realty s four core businesses have different risk profiles and capitalrequirements. As a result, the Company has established an exceptionally wellbalanced business portfolio.

Leasing
In leasing, our operations require substantial capital investment but only a relatively low level of humanresources. The period from the initial investment to the generation of revenue—the operational cycle—
is long, but once a building is opened for occupancy it provides a stable, sustained source of revenue.
While the level of revenue is small compared to the investment, the operating margins are high.

Sales
The sales business requires substantial advance investment, but in comparison with leasing the turnoverof funds is rapid and a higher level of human resources is required. Sales entails a high degree of,volatility; historically, Japan s condominium market has been characterized by pronounced boom andbust cycles. Nonetheless, sales and profits are both substantial. To minimize the influence of market
fluctuations on its ability to achieve stable profitability, the Company emphasizes supply stability.

Construction
In construction, less capital is required, but the human resources requirements are substantial.
The operational cycle is short, about six months to a year, but our construction operations require
product development capabilities. The cost of sales ratio is high, and the operating margins are low.
Competition in the market for detached housing is intense, and as a result products must havedistinctive features. In contrast, we do not face competition from the other major companies in our
remodeling operations, which are recording solid growth.

Brokerage
Brokerage does not require significant capital, only human resources, and the operational cycle is theshortest of our fields of business. While brokerage operations do not require product development
capabilities, they do involve the effective use of service networks and human resources.

Taking Steps to Maintain Balance
Heretofore, due to the different characteristics of these four operational fields, the adverse effectof changing market conditions on one field was offset by favorable performances in others. Overall,
we have continued to record increased revenue and profits. Looking ahead, our basic strategy is tocontinue to achieve well-balanced growth in these four fields. To further reinforce our growthprospects in the years ahead, we will strive to develop a fifth pillar of our operations, and we are
currently searching for the operational field that would best complement our existing operations.

Revenue from Operations by Segment
237.0(Billions of yen)

222.0

Leasing

Sales

Construction

Brokerage

200

144.0

150

100

47.0

50

0

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006
(Forecast)11

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

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

1964

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

1970

Listed on the Tokyo and Osaka stock exchanges.

1973

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

1974

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

1975

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

1980

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

1982

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

1995

Commenced American Comfort standardized housing construction business.

1996

Commenced Shinchiku Sokkurisan remodeling business.

1997

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

1998

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

1999

Universal Home Inc., a consolidated subsidiary, listed on JASDAQ (over the counter with the Japan
Securities Dealers Association).
Commenced real estate joint investment trust fund. Launched sales of Sumitomo Realty Fund (SURF)
Kudanshita.

2000

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

2001

The number of managed STEP brokerage offices exceeded 200.

2002

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

2003

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

2004

Commenced sales of World City Towers.
Completed construction of Shiodome Sumitomo Building.

2005

12

Completed construction of Tokyo Shiodome Building.

Review of Operations

Leasing
In leasing, Sumitomo Realty has used
innovative initiatives to create newopportunities. In this way, the Company
has built a position of leadership in theleasing industry based on an outstanding
portfolio that includes many new, upscalebuildings in central Tokyo and on a direct
involvement in operations.

Izumi Garden Tower

Chiyoda First Building West

Sumitomo Realty made its full-scale entry into the leasing business in the latter half of the 1970s. In,
1995, following the collapse of Japan s bubble economy, we were the first company in the industry torestart construction work on office buildings. We paid special attention to large-scale projects in urban
areas, especially those areas legally designated for redevelopment, and we currently have about 200
buildings for lease. Our gross floor area increased from 2.1 million square meters at the end of March
2000 to 3.1 million square meters at the end of March 2005, and it is expected to increase further, to
3.3 million square meters, by the end of March 2007. The average age of our portfolio is 13 years, the,lowest among Japan s major real estate companies, and, because we strive to always provide buildingsthat accurately meet tenant needs, we are in the top three in the industry in leasing revenue. Based on
the concept that buildings are important facilities that help tenants to improve their operational
efficiency, we not only provide efficient, large-scale spaces but also work to anticipate the needs ofthe market in factors ranging from IT capabilities to earthquake resistance.
Our buildings offer the electrical capacity needed for individual climate control systems, and forbuildings completed since 1997 power failures can be avoided for extended periods of time, even in
emergencies.
These types of advanced interior features are complemented with distinctive exterior designs, including
hotel-like entranceways and all-glass exteriors. Sumitomo Realty creates innovative buildings withstrong market presences.
13

Our strengths in leasing include an outstanding portfolio that is heavily weighted in central Tokyo.
The concentration of commercial activity in central Tokyo continues to increase, particularly in theservice sector, and we are well positioned to benefit from that trend, with 83% of our buildings in,Tokyo s central 7 wards and 93% in the central 23 wards. Another strength is the age of our portfolio,
which is composed of many comparatively new, upscale buildings with modern earthquake-resistantfeatures. Overall, 44% of our buildings are less than 10 years old and 92%1 are less than 20 years old.
Our success in leasing is based on our direct involvement in sales, development, and building,
management. Sumitomo Realty s highly capable sales personnel maintain close contact with potential
clients. We develop office buildings that offer the latest specifications and meet client requirements.
We also directly manage our office buildings. As a result, we can offer meticulous service, promptly
identify tenant needs, and negotiate arrangements directly with tenants.
With these strengths, our portfolio offers both stable revenue and significant potential for future
growth.
,Note:1. Two of the Company s major properties, the Shinjuku Sumitomo Building and the Shinjuku NS Building, are included in thiscategory because, although they are more than 20 years old, they are super high-rise buildings with high-performance facilities
and offer earthquake resistance in excess of the standards of newer buildings.

Shiodome Sumitomo Building

Tokyo Shiodome Building

Gross Floor Area

Leasing Portfolio(Thousand m2)
3.08 million m2

3,082
3,000

2,752
2,232

2,876

Tokyo CBD* 83%

Close

23 wards 93%

2,360

2,000
New

Less than 20 years old** 92%

LargeOver 10,000 m2 79%

1,000

0
FY 2001

2002

2003

2004

2005

0

25

50

75

100 (%)* Tokyo CBD (Central Business District): 7 wards, comprising Chiyoda,
Minato, Chuo, Shinjuku, Shibuya, Shinagawa, and Bunkyo**See Note 1 above

14

Principal Buildings
Name

No. of Floors(aboveground /underground)

Completion

Location(Tokyo)Gross Floor
Area (m2)

Izumi Garden Tower

43 / 4Oct. 02

Minato Ward

205,503

Shinjuku Sumitomo
Building

52 / 4Mar. 74

Shinjuku Ward

177,467

Shinjuku Oak City

38 / 2

Jan. 03

Shinjuku Ward

117,446

Shiodome Sumitomo
Building

25 / 3

July 04

Minato Ward

99,913

Tokyo Shiodome Building

37 / 4Jan. 05

Minato Ward

95,128
Shibakoen First Building

Shinjuku NS Building

30 / 3

Sept. 82

Shinjuku Ward

75,046

Shibakoen First Building

35 / 2June 00

Minato Ward

63,822

Chiyoda First BuildingWest

32 / 2

Jan. 04

Chiyoda Ward

61,501

Sumitomo Fudosan
Iidabashi No. 3 Building

24 / 2

Oct. 02

Shinjuku Ward

53,047

Sumitomo Fudosan
Iidabashi First Building

14 / 2Mar. 00

Bunkyo Ward

52,855

Chiyoda First Building
East

17 / 2

Oct. 98

Chiyoda Ward

37,473

Sumitomo Fudosan
Shibakoen Tower

30 / 2

Oct. 01

Minato Ward

36,605

Shibuya Infoss Tower

21 / 4Mar. 98

Shibuya Ward

34,183

Roppongi First Building

20 / 4Oct. 93

Minato Ward

31,516

Sumitomo Fudosan
Korakuen Building

20 / 2

Aug. 98

Bunkyo Ward

28,633

Sumitomo Fudosan
Oimachi-ekimae Building

14 / 2

Sept. 02

Shinagawa Ward

28,152

Sumitomo Fudosan
Takanawa Park Tower

20 / 2

Jan. 95

Shinagawa Ward

23,961

Sumitomo Fudosan Shiba
Building

15 / 2

May 90

Minato Ward

23,764

Nihonbashi Hakozaki
Building

17 / 2Mar. 96

Chuo Ward

23,486

Hanzomon First Building

15 / 2

Jan. 04

Chiyoda Ward

23,138

Sumitomo Fudosan Iidabashi
First Building

Hanzomon First Building

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

15

Review of Operations

Sales

Sumitomo Realty pioneered the Japanesemarket in condominium development forsales, establishing its condominium sales
business earlier than almost all of its
competitors. Today, the development andsale of condominiums is the core of the,Company s sales business, accounting for
more than 95% of sales in this segment.

City Tower Shinjuku-Shintoshin,,
The Company s condominium operations are centered in Japan s six largest urban areas—the Tokyo
metropolitan area, Osaka/Kobe, Sapporo, Sendai, Nagoya, and Fukuoka. In addition, in recent years
we have also enhanced our presence in such other major cities as Niigata and Matsuyama. We
develop and sell approximately 5,000 units a year.
For the past four years, we have been one of the top five companies nationwide in condominium units
sold. This high ranking is the result of our central urban strategy, which we implemented ahead ofcompetitors, and our aggressive approach to large-scale and high-rise condominiums. Our landmark
exterior designs, the rich array of common facilities that is made possible by the large scale of thebuildings, and elegant entrances make our condominiums sought after by a wide range of consumers
with diverse lifestyles. As a result, our high operating profit margin is at the top of the industry.
,Market fluctuation risk is a critical factor in the condominium business. Accordingly, the Company s,
policy is to offer a stable supply of condominiums and to enhance Sumitomo Realty s brand throughthe ongoing sale of high-quality units. Looking ahead, the Company will continue striving to maintainits high ranking and further expand its business.

City Tower Shinjuku-Shintoshin

High-rise condominium
building with 37 abovegroundfloors, providing panoramic
views of Tokyo

Units Delivered

Units Supplied and Industry Ranking(Units)(Units)
4,994

5,000
4,499

6,000
5,309

4,473

4,146
4,000

4,580

3,626
4,000

4,278

4,335

6th

3rd

CY 2000

2001

2nd

2nd

4,559
4th

3,000

2,000
2,000
1,000

0

0
FY

2001

2002

2003

2004

2005

Note: Total of condominiums, detached houses, and land lots

16

2002

2003

2004

Overview of Major Condominium Development Projects
Scheduled for Completion during Top Gear Growth Three-Year Plan
Project

Location

No. ofUnits

No. ofFloorsScheduled
DeliveryCompleted
Tokyo Mega City

Kita Ward, Tokyo

863

20

FY 2005

Kugayama Garden Hills

Setagaya Ward, Tokyo405

6

FY 2005

City Tower Shinjuku-Shintoshin

Shinjuku Ward, Tokyo

262

37

FY 2005

Mejiro Garden Hills

Toshima Ward, Tokyo

396

11

FY 2006

Denen Station Terrace

Kawasaki308*

6

FY 2006

World City Towers

Minato Ward, Tokyo

2,090

42

FY 2006 /2007

Tokyo Terrace

Setagaya Ward, Tokyo

1,036*

14

FY 2006 /2007

Le Cinq Osaki City Tower

Shinagawa Ward, Tokyo

254*

27

FY 2007

The Tower & Parks
Denentoshi Mizonokuchi

Kawasaki

648*

32

FY 2007

City Tower Nishi-Umeda

Osaka

349*

50

FY 2007

City Tower Gran Tennouji

Osaka

246*

43

FY 2007

Fujigaoka Project

Nagoya270

15

FY 2007

PlannedCity Tower Nishi-Umeda* No. of units includes the units of business partners

Tokyo Mega City

Large-scale condominium buildings with such
distinctive features as a large garden of about
3,000 square meters and 16 types of spa facilities

World City Towers

17

Review of Operations

Construction,
In the construction business, Sumitomo Realty s
business comprises the construction of detachedhouses and house remodeling. Our construction
operations are order based and do not require
substantial amounts of capital.

J-Urban III

Detached Houses
Sumitomo Realty used the know-how that it acquired in building and selling homes constructed withthe two-by-four method in California to launch the American Comfort line of high-quality, low-costWestern-style homes in Japan in 1995. Today, under the brand name Series of World Home Designs,
we sell homes based on designs from countries around the world. In April 2003, we launched the
J-Urban home design, which combines the excellent security features of condominiums with thesuperior ventilation and lighting of detached houses. J-Urban has been well received in themarketplace and has received awards for design excellence.

J-Urban (Patio)

World Home Designs• Advanced performance: Our original Power Column Method makes these homes 1.3 times
more earthquake resistant than conventional two-by-four homes.
• Fixed price: We have an easily understood pricing system, and the use of original materials andcentralized purchasing enables us to achieve significant price reductions.
• Complete after-sales support: Our homes are backed by a 20-year guarantee and our specialists
conduct periodic inspections.

(Before)Remodeling
In 1996, Sumitomo Realty launched the Shinchiku Sokkurisan Full Remodeling Package, which
addressed the concern that remodeling could sometimes be more expensive than rebuilding in Japandue to the risk of cost overruns. With Shinchiku Sokkurisan, a house can be fully remodeled at half
the cost and in half the time required to rebuild it. And because Shinchiku Sokkurisan uses lessmaterials, it is also environmentally friendly. We are the only major real estate company offering thistype of product, and Shinchiku Sokkurisan has been well received in the marketplace. Cumulative
sales have surpassed 20,000 units, and Shinchiku Sokkurisan continues to record solid growth.
Shinchiku Sokkurisan• Sales engineer system: Most of our sales personnel have engineering qualifications.
• Carpenters: We use a system of carpenters who work exclusively for Sumitomo Realty.
• Fixed price: We provide the customer with a fixed price per unit of floor area, so there are noconcerns about additional construction charges.
• No need for temporary moves: Our ability to remodel a home while the customer continues tolive there is a major advantage.
• Earthquake resistance: We incorporate earthquake-resistance strengthening measures based on
a computerized analysis of the home as well as measures to prevent damage from insects andmoisture.
18(After)Shinchiku Sokkurisan

Custom Home Units Contracted

Shinchiku Sokkurisan Units Contracted(Units)(Units)

3,000

6,000

2,801

5,550
4,843

2,362

2,271
2,083

2,083

4,121
3,770

4,000

2,000

2,951

1,000

2,000

0

0
FY

2001

2002

2003

2004

2005

FY

2001

2002

2003

2004

2005

Brokerage,
The Company s real estate brokerage business is handled by Sumitomo Real Estate Sales
Co., Ltd., which was established in 1975 to conduct sales of condominiums developed by
Sumitomo Realty. After entering the real estate brokerage sector in 1979, Sumitomo
Real Estate Sales achieved significant success in that field, and it was listed on the firstsection of the Tokyo Stock Exchange in 1998.
Directly Managed Brokerage Offices

Under the STEP brand name, Sumitomo Real Estate Sales operates
a network of brokerage offices with close ties to local communities.
The network has been steadily expanded and upgraded, and thenumber of offices reached 218 by the end of March 2005.
Because all of the brokerage offices are directly owned andoperated, the network boasts high profit margins. Sumitomo Real
Estate Sales holds the number one position in the industry in termsof brokerage revenue from direct operations and in terms of
profitability. In the future, the company will continue working to
expand its marketing base and increase its market share.

(As of March 31, 2005)

Hokkaido

3

TohokuKansai68
Chugoku
Kyushu5

Total: 218

4
Tokai

12
Number of Transactions

4

122
Tokyo Metropolitan Area

Transaction Value(Millions of yen)

30,00010,00026,95323,051

23,96827,236

8,997

24,436

7,915

8,000
7,058

6,935

6,840

2001

2002

2003

20,0006,000

4,000
10,0002,000

00FY 2001

2002

2003

2004

2005

FY

2004

2005

19

Financial
SectionSix-Year Financial Summary
Sumitomo Realty & Development Co., Ltd. and its consolidated subsidiaries
Years ended March 31
Millions of yen
2005

2004

2003

2002

2001

2000

For the Year
Revenue from Operations
Leasing
Sales
Construction
Brokerage¥616,115
221,234
224,191
127,388
43,445¥573,862
202,776
213,303
125,086
39,809¥533,915
192,979
183,745
124,464
37,577¥497,877
178,034
170,428
115,329
36,184¥459,245
164,575
149,196
113,549
34,881¥421,587
152,803150,486
87,16631,923

Cost of Revenue from Operations

470,636

435,078

403,777

377,199

349,597

319,997

SG&A Expenses% of Revenue from Operations

45,1887.3%

42,807
7.5%

41,6267.8%

40,3088.1%

34,4307.5%

31,042
7.4%

Operating Income% of Revenue from Operations

100,291
16.3%

95,97716.7%

88,512
16.6%

80,37016.1%

75,21816.4%

70,548
16.7%

Depreciation and Amortization

14,01912,211

11,973

10,731

10,377

11,269¥ 481,341
260,6132,136,329
320,098
935,155¥ 503,911
234,019
2,090,970
303,875
916,156¥ 423,446
189,136
2,015,667
211,821
1,036,419¥ 404,999
178,450
1,972,735
213,767
1,098,407¥ 374,328
149,215
1,903,529
193,442
1,183,674¥ 32.64673.409.00¥ 15.34
639.01
9.00¥ 12.22520.84
6.00¥ 56.50525.17
6.00¥ (44.27)
475.51
6.00¥ 36.23529.82
6.00

15.0
2.92

14.5
3.01

10.5
4.89

10.8
5.14

10.2
6.12

11.0
6.31

At Year End
Current Assets
Sales Inventory*
Total Assets
Shareholders’ Equity
Net Interest-Bearing Debt
Per Share Amounts (Yen and Dollars)
Net Income (Loss)
Shareholders’ Equity
Cash Dividend Applicable to the Year
Key Ratios
Equity Ratio (%)
Net Debt/Equity Ratio (Times)* Sales Inventory = Inventories + Investments in SPCs holding properties for saleC o n t e n t sManagement’s Discussion and Analysis

20

21

Consolidated Balance Sheets

26

Consolidated Statements of Income

28

Consolidated Statements of Shareholders’ Equity

29

Consolidated Statements of Cash Flows30

Notes to Consolidated Financial Statements

31

Independent Auditors’ Report

45¥

370,078
128,310
1,916,343
211,140
1,331,269

Management’s Discussion and Analysis
Overview

Revenue from Leasing Operations(Billions of yen)In fiscal 2005, ended March 31, 2005, we recorded our eighth consecutive year of increased revenue from operations, operating income, and ordinary profit. Operating income surpassed ¥100 billion for the first time, and ordinary profit set a record high level for the fifth consecutive year. We
posted record high sales and profits in our four major business segments.

250
221.2
193.0
164.6

222.0

202.8

178.0

125

Segment Review
Leasing BusinessIn the Tokyo office building market, which accounts for more than 90% of our leasing assets, thesupply of new office buildings leveled off in the year under review, while tenant demand increased
accompanying Japan’s economic recovery. The resulting improvement in the demand-supply balance spread throughout the market, and the vacancy rate declined markedly, especially in newbuildings, while actual rents began to rise. There were signs of a shift in the composition of demand,from tenants seeking to reduce costs, improve operational efficiency, and consolidate work sites totenants looking to increase floor space against a background of economic recovery.
The leasing segment recorded substantial increases in sales and profits. The vacancy rate improved
from 7.9% at the end of the previous fiscal year to 6.9% at the end of the year under review, andrenewal rents, which are set every two years when leases are renewed, stopped declining. As aresult, the decline in revenue from existing buildings leveled out. In addition, full-year contributions
were made by such properties as the Chiyoda First Building West and the Hanzomon First Building,and new buildings were opened, such as the Shiodome Sumitomo Building.
To make further progress in concentrating our portfolio on prime properties, we sold eight smallbuildings with a total gross floor area of 20,998 square meters. Each building was 10 to 20 years
old, making it old for our portfolio.
In the current fiscal year, ending March 2006, we expect the favorable market conditions to continue. We plan to open only one new building, but full-year contributions will be made by such properties as the Shiodome Sumitomo Building, which has a floor area of 99,913 square meters, and theTokyo Shiodome Building, with a floor area of 190,257 square meters (half of which belongs to
Sumitomo Realty). Moreover, an increase in revenue from existing buildings due to an improved
vacancy rate will offset a decline in tenant improvement work. Accordingly, we anticipate higher
sales and profits in the leasing segment.
Sales BusinessIn the condominium market, which accounts for more than 95% of our business in this segment,
supply remained at a high level in the year under review, with more than 80,000 units sold in theTokyo metropolitan area for the sixth consecutive year. Demand came from a wide range of buyers,
including middle-aged customers and senior citizens moving from the suburbs to downtown areas,
double-income families, and first-time buyers, principally the children of baby boomers. Large buildings in urban settings enjoyed especially strong demand.

0(Forecast)

Operating Income and Operating
Income Margin: Leasing(Billions of yen)
60
53.3
46.4
40 28.2

49.2

27.6

27.6

52.7

26.0

55.9

25.3

59.0

26.6

20

0

2001 2002 2003 2004 2005 2006
(Forecast)
Operating Income
Operating Income Margin (%)

Revenue from Sales Operations(Billions of yen)
250
213.3
170.4

224.2

237.0

183.7

149.2
125

0

2001 2002 2003 2004 2005 2006
(Forecast)

Operating Income and Operating
Income Margin: Sales(Billions of yen)
40
32.3

32.4

32.5

15.1

14.4

13.7

30
24.4

25.8

20 19.7

10

Note: Figures in the graphs on pages 21 and 22 include intersegment transactions.

2001 2002 2003 2004 2005 2006

0

13.2

14.3

14.0

2001 2002 2003 2004 2005 2006
(Forecast)
Operating Income
Operating Income Margin (%)

21

Revenue from Construction
Operations(Billions of yen)
150

144.0
124.5
113.5

125.1

127.4

115.3

100

The sales business segment recorded higher sales due to an increase in the number of units delivered, and operating income rose. Profitability decreased slightly, but this decline was attributable tothe unusually high level of profitability in the previous fiscal year and does not indicate a significant
issue. The number of condominium units sold reached 5,229, a substantial increase over the previous record of 4,358 units, which was set in the year ended March 2002. At the end of the year
under review, the Company had 1,277 condominium units completed but not yet sold, comparedwith 860 at the end of the previous fiscal year.

50

02001 2002 2003 2004 2005 2006
(Forecast)

In the current fiscal year, we anticipate firm demand and solid market conditions, and the numberof condominium units in inventory at the end of March 2006 is forecast to decline from the end of
March 2005. We expect to deliver 5,100 condominiums and detached houses in the current year,
an increase of 173 from the year under review.

Operating Income and Operating
Income Margin: Construction(Billions of yen)
10.0

10
8.2

8.4

6.6

6.6

Construction Business
The construction business segment recorded higher sales and profits for the fourth consecutive year.

8
7.0
6
4.8
4

4.0
3.5

6.9

5.6

4.1

2
0

2001 2002 2003 2004 2005 2006
(Forecast)
Operating Income
Operating Income Margin (%)

Revenue from Brokerage
Operations(Billions of yen)
50

47.0
43.4
34.9

36.2

37.6

39.8

In new detached housing, market conditions were difficult, as the number of detached housing
starts once again began to decline. Due to the success of J-Urban, which was launched in the previous fiscal year, the number of units contracted increased 9% year on year. Nonetheless, the numberof units delivered declined because we worked to spread out construction, which had generally
been concentrated in the year-end period, more evenly throughout the year in order to improve
quality and to reduce labor and other costs.
In Shinchiku Sokkurisan home remodeling operations, business continued to expand favorably.
The number of units contracted rose 14%, and the number of units delivered was up 17%.
In the current fiscal year, we will continue to strengthen our operations, launching J-Urban III and
J-Urban Court in new detached housing operations and further improving our marketing system for
Shinchiku Sokkurisan home remodeling operations. We anticipate growth in each of this segment’s
operational areas, continued expansion in sales and profits, and operating income of ¥10.0 billion.

25

02001 2002 2003 2004 2005 2006

Brokerage BusinessIn the market for existing homes, the number of transactions declined year on year. However, due
to increases in the number of transactions involving comparatively new buildings and properties forinvestment, prices rose in the Tokyo metropolitan area and stopped declining in the Kansai area.

(Forecast)

Operating Income and Operating
Income Margin: Brokerage(Billions of yen)
14.5

15
13.5

10

8.7
25.0

5

0

22

8.0

7.8

22.0

20.7

8.5
31.0

In the brokerage business segment, we took steps to enhance our ability to attract customers. We
added 7 directly managed brokerage offices, for a total of 218 at year-end, and we relocated andrenovated several existing offices. We also worked to sell properties for investment to real estate
funds, which are recording rapid growth. As a result, the number of transactions grew only 1%,
but transaction value rose substantially, up 13%.

30.9

21.4

2001 2002 2003 2004 2005 2006
(Forecast)
Operating Income
Operating Income Margin (%)

In the current fiscal year, we will continue striving to increase our market share. Specifically, we will
open new offices and enhance existing offices and will work to raise operational efficiency througha bolstered IT strategy. To further expand profits, we will take steps to improve our customer basein wholesale brokerage.

Other BusinessIn the other business segment, which includes fitness clubs, restaurants, and finance companies,
revenue from operations was ¥11.6 billion, an increase of ¥0.7 billion, and operating income was¥1.4 billion, up ¥1.0 billion.

Revenue from Operations(Billions of yen)
700

650.0

616.1

459.2

497.9

533.9

573.9

Financial Review
350

Results of Operations
In fiscal 2005, revenue from operations was up 7.4%, to ¥616.1 billion. Cost of revenue from operations rose 8.2%, to ¥470.6 billion, and selling, general and administrative (SG&A) expenses wereup 5.6%, to ¥45.2 billion. As a result, operating income increased 4.5%, to ¥100.3 billion.
Net other expenses were ¥69.6 billion, compared with ¥80.4 billion in the previous fiscal year.
Interest expense, net, was ¥19.2 billion. Loss on sale and devaluation of property and equipment
associated with steps taken in preparation for the implementation of impairment accounting fromthe fiscal year ending March 2006 was ¥15.7 billion, and loss on sale and devaluation of property
and equipment resulting from scrap and build initiatives totaled ¥20.6 billion.
Income before income taxes and minority interests totaled ¥30.7 billion, up from ¥15.6 billion a year
earlier. Total income taxes were ¥13.0 billion. Net income grew 146.0%, to ¥15.5 billion.
Capital Resources and Financial Position
In the year under review, to enhance our ability to compete in the capital-intensive areas of leasing
and sales, we raised ¥71.9 billion in new capital through a public offering. Our credit rating wasraised, enabling us to utilize long-term debt and issue bonds under more favorable terms. At theend of the year under review, 85% of our interest-bearing debt was long term, compared with
80% at the end of the previous fiscal year, and 87% was at fixed interest rates, compared with
82% a year earlier.

02001 2002 2003 2004 2005 2006
(Forecast)

Operating Income andOperating Income Margin(Billions of yen)120
96.0
80 75.2
16.4

16.1

0

16.3

16.5

2001 2002 2003 2004 2005 2006
(Forecast)
Operating Income
Operating Income Margin (%)

Shareholders’ Equity
and Equity Ratio(Billions of yen)
320

303.9

213.8

211.8

10.8

10.5

193.4
160

10.2

14.5

320.1

15.0

80

2001 2002 2003
Shareholders’ Equity
Equity Ratio (%)

2004

2005

Net Interest-Bearing Debt,
ND/OP Ratio, and ND/E Ratio(Billions of yen)
1,200 1,183.7

Investments in SPCs include properties for sale and those to be held for leasing. The former arerecorded in the current assets section of the balance sheet as investments in SPCs holding properties
for sale, while the latter are recorded in the investments and advances section of the balance sheet
as investments in securities and other. When properties for sale are sold, the proceeds are recorded
as revenue in the sales business segment. As of March 31, 2005, investments in SPCs holding properties for sale totaled ¥49.4 billion, an increase of 11.2% from the previous year-end, and the balance of properties held for leasing was ¥59.2 billion.

16.7

16.6

40

0

In our core leasing and sales segments, significant advance investment is required. To improve ourfinancial position and grow our operations, we are aggressively using methods of raising funds that
do not rely on interest-bearing debt, such as non-recourse financing utilizing SPCs and investment
partnerships.

107.0

80.4

240

In addition to growth in shareholders’ equity, operating income continues to increase. We continue
to record improvement in the ratios of net interest-bearing debt to operating income and net interest-bearing debt to shareholders’ equity, which are key financial indicators in the Top Gear GrowthThree-Year Plan. At the end of the year under review, consolidated interest-bearing debt was¥1,038.4 billion, down ¥10.2 billion from a year earlier.

100.3

88.5

800

1,098.4

1,036.4
916.2

935.2

9.4

9.2

3.0

2.9

15.5
13.5
11.6

400
6.1

0

5.1

4.9

2001 2002 2003 2004 2005
Net Interest-Bearing Debt
ND/OP Ratio (Times)
ND/E Ratio (Times)

23

Leasing Assets and Return on
Leasing Assets(Billions of yen)
1,600
1,415.8

1,506.1

1,200

4.5

4.2

1,517.7

1,481.8

4.7

4.7

1,538.5

5.0

800

400

The SPC leasing property revenue structure comprises four stages. The Company leases buildings
and then subleases to tenants, and as a result rent payments from tenants are recorded as leasing
revenue by Sumitomo Realty. The Company masterleases the tenants from the SPC and then makes
payment to the SPC, recording the payment as cost of leasing. The SPC records the payment from
Sumitomo Realty as rent received; deducts expenses, such as fixed asset taxes, insurance premiums,
depreciation and amortization, and interest on non-recourse loans; and pays the remainder to
Sumitomo Realty as dividends. Sumitomo Realty records the dividend payments as leasing sales.
In investment partnerships, for SURF (Sumitomo Realty Fund), an investment scheme for office build-0

2001 2002 2003 2004
Leasing Assets
Return on Leasing Assets (%)

2005

Sales Inventory and Inventory
Turnover(Billions of yen)
300
260.6

ings in Japan that is similar to a U.S.-style limited partnership, Sumitomo Realty acts as general partner. In accordance with Japanese accounting standards for such associations, all revenue and expenses
are recorded on the Company’s income statements. Dividends to partnership investors are recorded
as other expenses. On the balance sheets, the properties are recorded under fixed assets, and payments from investors are recorded under fixed liabilities as long-term deposits. By the end of March
2005, the SURF investment had grown into a large-scale investment product, with ¥191.0 billion in
investment received.

234.0
200

178.5

189.1

149.2
100 1.00

0

0.96

0.97

0.91

0.86

2001 2002 2003 2004
Sales Inventory
Inventory Turnover (%)

2005

Cash Flow
Net cash provided by operating activities was ¥48.0 billion, an increase of ¥14.4 billion from theprevious fiscal year. Income before income tax and minority interests increased to ¥30.7 billion,
decrease in notes and accounts payable–trade was ¥27.0 billion, and increase in advances received
was ¥6.7 billion.
Net cash used in investing activities totaled ¥60.8 billion. Payments for purchases of property andequipment amounted to ¥106.8 billion, and proceeds from sale of property and equipment was¥21.9 billion.

Total Assets(Billions of yen)
2,400
1,903.5

1,972.7

2,015.7

2001

2002

2003

2,091.0

2,136.3

2004

2005

1,800

1,200

Net cash used in financing activities was ¥16.3 billion. Decrease in short-term debt was ¥32.2 billion, and redemption of bonds and notes was ¥77.5 billion. Proceeds from issuance of bonds andnotes was ¥80.0 billion. Interest-bearing debt was reduced by ¥10.2 billion. In preparation for J-REIT
participation, we sold eight office buildings to an SPC in September 2003, and in the year underreview we repurchased those buildings at the selling price due to a postponement of the REIT
participation.

600

0

Number of Employees inCore Segments
7,000

6,348
5,815

Background
6,621

5,815

5,410

3,500

0

24

2001 2002
LeasingSales

2003 2004
Construction
Brokerage

Cash and cash equivalents at the end of the year totaled ¥103.2 billion, down from ¥132.5 billion
at the end of the previous year.

2005

Sumitomo Realty was formed from the dissolution of the Sumitomo zaibatsu, one of the four majorfamily-dominated financial and industrial combines that had largely controlled the Japanese economy until the end of World War II. Inheriting the respected Sumitomo brand, each Sumitomo company became an independent entity. Sumitomo Realty was incorporated in 1949 within the Sumitomo
Group to manage the residual real estate assets of the zaibatsu. The brand name, however, was oneof the few assets the Company inherited. At the time of its founding, in terms of assets, Sumitomo

Realty was far behind the two giants in the domestic real estate industry—Mitsubishi Estate, whichbecame heir to the entire Marunouchi area, and Mitsui Fudosan, which took over the real estatebusiness of the Mitsui zaibatsu. Sumitomo Realty, which recorded growth as a condominium developer, did not have stable sources of revenue, such as those from leasing. As a result, the oil shock of
the 1970s resulted in a management crisis for the Company, which subsequently began to expand
its leasing operations. However, the bursting of Japan’s economic bubble in the early 1990s led to asecond crisis for Sumitomo Realty. As a result of these crises, the Company was unable to accumulate capital, and, in comparison with its major competitors, its financial position was significantly
weaker. However, Sumitomo Realty’s growth strategy requires capital for leasing and sales, which
are capital intensive, and accordingly the Company has taken steps to enhance its capital structure.
Operating Risks

ROE1
(%)
20
11.3
10
5.0

2.3

2.5

2003

2004

2005

4.7

4.8

2004

2005

0
–8.8

–10

–20

2001

2002

ROA2
(%)

Sumitomo Realty’s operations are subject to the following risks that might influence the judgmentof investors.

5
4.5
4

Changes in the Operating Environment
Leasing, sales, construction, and brokerage operations are affected by such factors as economic
trends, corporate performances, personal incomes, land price trends, interest rates and other financial matters, and housing taxes, and these factors could influence the Group’s results of operations
and financial position.

4.0

4.2

3
2
1
0

2001

2002

2003

Increase in Supply
An increase in new buildings, an increase in new condominium units, an increase in competitors,
or other factors resulting in an increase in overall supply and intensified competition could affect
the Group’s results of operations and financial position.
Legal Regulations
The operations conducted by the Group are covered by a range of legal regulations, and revision
could affect the Group’s results of operations and financial position. The principal laws affecting
the Group are the Building Lots and Building Transactions Business Law, the Construction Law,
the Leased Land and House Lease Law, the Building Standards Law, the Urban Planning Law, theUrban Redevelopment Law, the Law for Compartmented-Ownership, etc., of Buildings, and the
National Land Use Planning Law.
Natural or Man-Made Disasters
In the event of an earthquake, wind and flood damage, accidents, fires, or man-made disasters,such as terrorist incidents, etc., the Group’s results of operations and financial position could be
affected.
Major Lawsuits
In regard to the rent on office buildings leased by the Company, two requests for rent reductions inaccordance with the Leased Land and House Lease Law are currently in litigation. Both have been
sent back from the Japanese Supreme Court to the Tokyo Higher Court. In the event of an unfavorable ruling, the Group’s results of operations and financial position could be affected.
Notes: 1. ROE = Net income / Simple average of shareholders’ equity
2. ROA = (Operating income + Interest income and dividend income) / Simple average of total assets

25Consolidated Balance Sheets
Sumitomo Realty & Development Co., Ltd. and its consolidated subsidiaries
As of March 31, 2005 and 2004

Millions of yen

AssetsCurrent assets:Cash, time and notice deposits (Note 3)
Marketable securities (Note 7)
Investments in SPCs holding properties for sale (Note 7)
Notes and accounts receivable–trade
Loans receivable
Allowance for doubtful accounts
Inventories (Note 4)
Deferred income taxes (Note 12)
Other current assets
Total current assets

Investments and advances:
Investments in and advances to unconsolidated
subsidiaries and affiliates (Note 5)
Investments in securities and other (Note 7)
Allowance for doubtful accounts
Total investments and advances

Property and equipment (Note 6):Land
Buildings and structures
Machinery and equipment
Construction in progress
Accumulated depreciation
Net property and equipment

Other assets:
Guarantee and lease deposits paid to lessors
Leasehold rights and other intangible assets (Note 6)
Deferred income taxes (Note 12)
Other
Total other assets

See accompanying notes.

26

Thousands of
U.S. dollars(Note 1)

2005

2004

2005

¥ 103,235
1,203
49,434
31,462
56,844(23,591)
211,180
6,410
45,164
481,341¥ 132,474
517
44,47336,252
83,782(36,537)
189,547
12,60240,801
503,911

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

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

54,985
1,833,218(197,596)
1,690,607

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

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

8,721,608
3,761,946
161,144
26,463
12,671,161(1,251,165)
11,419,996

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

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

1,699,161
519,661
27,56264,0712,310,455$19,906,159$

961,936
11,209460,622
293,161
529,668(219,819)
1,967,760
59,728420,836
4,485,101

Millions of yen

Liabilities and Shareholders’ Equity
Current liabilities:
Short-term debt (Note 8)Long-term debt due within one year (Note 8)
Notes and accounts payable–trade
Accrued income taxes (Note 12)
Accrued bonuses
Deposits received (Notes 6, 13)
Other current liabilities
Total current liabilities¥ 173,245
225,182
45,005
7,799
2,941
193,872
71,204
719,248

Long-term liabilities:
Long-term debt due after one year (Note 8)
Guarantee and deposits received (Note 13)
Deferred income taxes (Note 12)
Allowance for employees’ severance and retirement benefits (Note 9)
Other long-term liabilities (Note 11)
Total long-term liabilities

Minority interests

2005

2004

¥

Thousands of
U.S. dollars(Note 1)
2005

205,423
198,242
72,002762
2,706
181,457
59,639720,231$ 1,614,284
2,098,230
419,353
72,671
27,404
1,806,485
663,474
6,701,901

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

644,964
397,460
6,533
4,748
1,249
1,054,954

5,963,120
3,986,377
76,86446,60832,491
10,105,460

12,465

11,910116,148

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

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

1,144,288
1,236,936
464,3032,845,527
176,705(33,386)(6,196)2,982,650$19,906,159

Contingent liabilities (Note 18)

Shareholders’ equity (Note 14):
Common stock:
Authorized – 780,000 thousand shares
Issued– 476,086 thousand shares
Capital surplus
Retained earnings
Net unrealized holding gains on securities
Foreign currency translation adjustments
Treasury stock
Total shareholders’ equity

27

Consolidated Statements of Income
For the years ended March 31, 2005, 2004 and 2003

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

Revenue from operations
Costs and expenses:
Cost of revenue from operations
Selling, general and administrative expenses
Operating income
Other income (expenses):
Interest expense, net
Dividend income
Loss on sale and devaluation of property and equipment (Note 10)
Loss on devaluation of investments in securities
Gain (Loss) on sale of investments in securities
Loss on disposal of property and equipment
Dividend to partnership investors
Loss on sale of property and equipment
Loss on devaluation of property and equipment
Loss on sale of loans receivable
Directors’ retirement benefits (Note 11)
Other, net
Income before income taxes and minority interests
Income taxes (Note 12):Current
Deferred
Total
Minority interests
Net income

2005

2004

2003

2005

¥616,115¥573,862¥533,915$5,740,915

470,636
45,188515,824
100,291

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

4,385,352
421,059
4,806,411
934,504(19,219)965(15,672)
(715)
121
(711)
(4,667)(8,726)(11,886)(3,481)(2,270)(3,339)(69,600)
30,691(23,266)705(49,414)
(144)
(286)
(539)
(3,889)————(3,561)(80,394)
15,583(25,660)
626(48,666)(4,643)(500)(598)(3,162)————(3,877)(86,480)
2,032(179,081)
8,992(146,031)(6,662)
1,127(6,625)(43,487)(81,308)(110,753)(32,436)(21,152)(31,112)(648,528)
285,976

7,414
5,592
13,006

1,036
6,334
7,370

781
(1,903)(1,122)

69,083
52,106
121,189

2,137

1,893

(1,820)19,912

4,974$ 144,875¥ 15,548

¥

6,320

¥

U.S. dollars(Note 1)

Yen

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

28¥32.64
32.64
9.00¥15.34—9.00¥12.22
—
6.00

$0.30
0.30
0.08

Consolidated Statements of Shareholders’ Equity
For the years ended March 31, 2005, 2004 and 2003

Thousands

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)
Bonuses to directors
Balance at March 31, 2003
Net income
Foreign currency translation adjustments
Net unrealized holding gains on securities
Issuance of common stock
Treasury stock
Gains on sale of treasury stock
Decrease due to mergerof consolidated subsidiaries
Cash dividends paid (¥6 per share)
Balance at March 31, 2004
Net income
Foreign currency translation adjustments
Net unrealized holding gains on securities
Treasury stock
Gains on sale of treasury stock
Increase due to merger ofconsolidated subsidiaries
Cash dividends paid (¥9 per share)
Bonuses to directors
Balance at March 31, 2005

Millions of yen

Number ofshares ofcommonstock

Commonstock

CapitalsurplusRetainedearnings

407,086
—
—
—
—
—
—
—
407,086———
69,000——¥ 86,787
—
—
—
—
—
—
—
86,787———36,018——¥ 96,822
—
—
—
—
—
—
—
96,822———35,921—
1¥32,165
4,974
—
—
—
10
(2,442)(14)
34,693
6,320
—
—
—
—
—

¥ (2,159)——(2,727)————(4,886)——
19,306—————
476,086
—
—
—
—
—

—
—
122,805
—
—
—
—
—

—
—
132,744
—
—
—
—
4

(1)
(2,440)38,572
15,548
—
—
—
—

—
—
—
476,086———¥122,805———¥132,748

13(4,280)(24)¥49,829

Commonstock

Balance at March 31, 2004
Net income
Foreign currency translation adjustments
Net unrealized holding gains on securities
Treasury stock
Gains on sale of treasury stock
Increase due to mergerof consolidated subsidiaries
Cash dividends paid ($0.08 per share)
Bonuses to directors
Balance at March 31, 2005

Capitalsurplus

Net unrealized
holding gains Foreign currency(losses) on
translation
securities
adjustments
Treasury stock

¥

182
—
(1,552)—————(1,370)—(2,892)————¥ (30)
—
—
—
(195)
—
—
—
(225)
—
—
—
—
(179)
—

—
—
14,420
—
—
4,544
—
—

—
—
(4,262)
—
679
—
—
—

—
—
(404)
—
—
—
(261)
—

—
—
—
¥18,964———¥(3,583)———¥(665)

Thousands of U.S. dollars (Note 1)
Net unrealized
holding gains
Foreign currency
Retained(losses) on
translation
earnings
securities
adjustments$1,144,288 $1,236,899 $359,411—— 144,875
—
—
—
—
—
—
—
—
—
—
37
—

Treasury stock$134,365——
42,340——$(39,713)
—
6,327
—
—
—

$(3,764)———(2,432)
—

—
—
121
—
—
— (39,881)
—
—
—
(223)
—
$1,144,288 $1,236,936 $464,303 $176,705———$(33,386)———$(6,196)

See accompanying notes.

29Consolidated Statements of Cash Flows
For the years ended March 31, 2005, 2004 and 2003

Thousands of
U.S. dollars(Note 1)Millions of yen
2005

Cash flows from operating activities:
Income before income taxes and minority interests
Depreciation and amortization
Provision for (Reversal of) allowance for doubtful accounts
Increase in employees’ severance and retirement benefits
Loss on sale and devaluation ofproperty and equipment (Note 10)
Loss on sale of property and equipment
Loss on devaluation of property and equipment
Loss on disposal of property and equipment
Loss (Gain) on sale of investments in securities
Loss on devaluation of investments in securities
Interest and dividend income
Interest expense
Increase in investments in SPCs holding properties for sale
Increase (Decrease) in notes and accounts receivable–trade
Increase in inventories
Decrease in loans receivable
Increase (Decrease) in notes and accounts payable–trade
Increase (Decrease) in advances received
Other, net
Total
Proceeds from interest and dividend income
Payments for interest
Receipts (Payments) for income tax and other taxes
Net cash provided by operating activities
Cash flows from investing activities:
Payments for purchases of property and equipment
Proceeds from sale of property and equipment
Payments for purchases of investments in securities
Proceeds from sale of investments in securities
Payments for investments in SPC and partnership
Proceeds from sale of investments /reduce capital in SPC and partnership
Decrease in guarantee and lease deposits paid to lessors
Increase in guarantee and lease deposits paid to lessors
Increase in guarantee and lease deposits received
Decrease in guarantee and lease deposits received
Receipts of deposits from partnership investors
Restitution of deposits from partnership investors
Other, net
Net cash used in investing activities
Cash flows from financing activities:
Decrease in short-term debt
Proceeds from issuance of bonds and notes
Redemption of bonds and notes
Increase (Decrease) in long-term debt
Proceeds from issuance of common stock
Increase (Decrease) in assignment of receivables
Cash dividends paid
Other, net
Net cash provided by (used in) financing activities
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
Cash and cash equivalents of subsidiaries excluded
from consolidation
Change in cash and cash equivalents due to mergerof consolidated subsidiaries
Cash and cash equivalents at end of year (Note 3)
See accompanying notes.

30¥ 30,691
14,019(17,321)
254

2004

2003

2005

¥ 15,583 ¥ 2,032
12,211
11,973(2,906)
1,134
437
567

$ 285,976
130,628(161,396)
2,367

15,672
8,726
11,886
711
(121)
715
(1,390)19,644(4,961)
4,787(20,004)
29,192(26,994)
6,688(4,563)
67,631

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

48,666
—
—
598
500
4,643
(956)
25,991(6,065)(4,512)(6,627)
2,031
16,984(294)
10,090106,755

146,031
81,308110,753
6,625(1,127)
6,662(12,952)
183,041(46,226)
44,605(186,396)
272,009(251,528)
62,318(42,517)630,181

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

963(23,663)
825
33,617

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

13,874(185,147)(11,359)
447,549(106,784)
21,902(9,315)1,561(7)(34,189)
18,095(21,966)768(10,325)(55,616)
14,369(47,489)
22,037(8,015)(995,006)
204,081(86,796)
14,545(65)—(5,341)
7,052(46,598)
34,761
111,474(67,590)(1,935)(60,820)

8,000(8,334)
5,489(36,062)
25,852112,943(76,248)3,469(12,508)—(4,025)
4,084(29,486)
22,75071,790(13,414)(10,634)(33,649)—(49,767)
65,710(434,196)
323,900
1,038,707(629,799)(18,030)(566,716)(32,178)
80,000(77,523)
19,461—
15,219(4,581)(16,658)(16,260)(87,428)
85,000(114,209)
27,14871,940(6,432)(2,696)44,10017,423(18,606)
126,700(106,444)(49,411)—
11,701(2,671)
2,977(35,754)(299,832)
745,434(722,354)
181,336—
141,810(42,685)(155,218)(151,509)(160)(1,763)8(1,491)(29,209)
132,476

36,76995,7038,136
87,567(272,167)
1,234,402

(31)

—

—

(289)

1
¥103,237

4¥132,476—¥ 95,703

9$ 961,955

Notes to Consolidated Financial Statements
As of and for the years ended March 31, 2005, 2004 and 2003

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

financial statements of the Company prepared in accordance withJapanese GAAP and filed with the appropriate Local Finance
Bureau of the Ministry of Finance as required by the Securities
and Exchange Law. Some supplementary information includedin the statutory Japanese language consolidated financial statements, but not required for fair presentation, is not presented in
the accompanying consolidated financial statements.
The translation of the Japanese yen amounts into U.S. dollars
is included solely for the convenience of readers outside Japan,
using the prevailing exchange rate at March 31, 2005, which was¥107.32 to U.S.$1. The convenience translations should not be
construed as representations that the Japanese yen amounts havebeen, could have been, or could in the future be, converted into
U.S. dollars at this or any other rate of exchange.

2. Accounting policies(1) Principles of consolidation
All companies are required to consolidate all significant investees
which are controlled through substantial ownership of majority
voting rights or existence of certain conditions.
The accompanying consolidated financial statements include
the accounts of the Company and significant companies overwhich the Company has power of control through majority voting
rights or existence of certain conditions evidencing control by theCompany.
In the elimination of investments in subsidiaries, the assets andliabilities of the subsidiaries, including the portion attributable tominority shareholders, are recorded based on the fair value at thetime the Company acquired control of the respective subsidiaries.
All significant intercompany balances, transactions and profits
have been eliminated in consolidation.
(2) Foreign currency translation
Receivables and payables denominated in foreign currencies aretranslated into Japanese yen at the year-end rates.
Financial statements of consolidated overseas subsidiaries aretranslated into Japanese yen at the year-end rate, except thatshareholders’ equity accounts are translated at historical rates
and income statement items resulting from transactions with theCompany at the rates used by the Company.
Differences arising from translation are presented as “Foreign
currency translation adjustments” in shareholders’ equity.
(3) Cash and cash equivalents
In preparing the consolidated statements of cash flows, cashon hand, readily-available deposits and short-term, highly liquid
investments with maturities not exceeding three months at thetime of purchase are considered to be cash and cash equivalents.

(4) Recognition of revenue
Revenues from sales of land and residential houses are recognizedwhen units are delivered and accepted by customers. Revenues
from leasing of office space, shops and apartments are recognized as rent accrues over the lease term.
(5) Inventories
Inventories are stated at cost which is determined by the specificidentification cost method.
With respect to the cost of consignment sales activities, theCompany uses a cost accounting approach for matching revenue
from sales of consigned properties and costs associated to suchproperties.
(6) Securities
Held-to-maturity securities are stated at amortized cost. Investments
in subsidiaries and affiliates that are not consolidated or accounted
for using the equity method are stated at moving-average cost.
Available-for-sale securities with available fair market values arestated at fair market value. Unrealized gains and unrealized losseson these securities are reported, net of applicable income taxes,
as a separate component of shareholders’ equity. Realized gains
and losses on sale of such securities are computed using movingaverage cost.
Investments in SPCs holding properties for sale and senior securities are stated at cost determined by the specific identification
method and securities with no available fair market value are stated at moving-average cost.
Investments in partnerships similar to investment limited partnerships, which are regarded as securities under the Securities
and Exchange Law, are accounted for in a manner similar to theequity method based on recent financial statements.

31

If the market value of held-to-maturity securities, investments in
subsidiaries and affiliates, available-for-sale securities and investments in SPCs holding properties for sale declines significantly,
such securities are stated at fair market value and the difference
between fair market value and the carrying amount is recognized
as a loss in the period of the decline. If the fair market value ofinvestments in unconsolidated subsidiaries and affiliatedcompanies not accounted for using the equity method is notreadily available, such securities should be written down to net
asset value with a corresponding charge in the income statementin 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.
In connection with enforcement of “Revision of Securities andExchange Law (“the Securities and Exchange Law”)” (Legislation
No. 97, June 9, 2004) on December 1, 2004 and amendment of“Practical Guidelines Concerning Accounting for Financial Instruments” on February 15, 2005, the Company and its consolidated
subsidiaries changed their balance sheet presentation of investments in partnerships similar to investment limited partnerships,
which are regarded as securities under the Securities and Exchange
Law, commencing March 31, 2005. As a result of the change,these investments are presented as “Investments in securities
and other”.
The investments in such partnerships included in “Investments
in securities and other” as of March 31, 2005 aggregated¥40,203 million ($374,609 thousand), whereas the contribution
to similar partnerships included in “Other assets” as of March 31,
2004 aggregated ¥45,091 million.
(7) Property and equipment
The Company and domestic consolidated subsidiaries depreciatebuildings using the straight-line method, and other property andequipment using the declining-balance method over their estimated useful lives. Overseas consolidated subsidiaries depreciateproperty and equipment using primarily the straight-line methodin 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(8) Impairment of fixed assets
On August 9, 2002, “Opinion Concerning Establishment of
Accounting Standard for Impairment of Fixed Assets” was issued
by the Business Accounting Deliberation Council and on October
31, 2003, the Financial Accounting Standard Implementation
Guidance No. 6 “Implementation Guidance for the AccountingStandard for Impairment of Fixed Assets” was issued by the
Accounting Standards Board of Japan. The adoption of this standard and guidance is mandatory effective at the beginning of the

32

fiscal year beginning on or after April 1, 2005. Earlier applicationof this standard and guidance is permitted.
The Company has not adopted this standard and guidance early.
(9) Software costs
Software costs are amortized using the straight-line method overthe estimated useful lives (five years).
(10) Allowance for doubtful accounts
The Company and its consolidated subsidiaries provide for doubtful accounts at an estimated uncollectable amount based on theevaluation of certain identified doubtful and bankrupt receivables
plus an amount calculated using the percentage of actual collection losses in certain reference periods with respect to remaining
receivables.
(11) Finance leases
Finance leases, except those leases for which the ownership ofthe leased assets is considered to be transferred to the lessee,
are accounted for in the same manner as operating leases.
(12) Income taxes
Income taxes are provided for on the basis of income for financial
statement purposes. The tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
statements and income tax purposes are recognized as deferredincome taxes.
(13) Employees’ severance and retirement benefits
The Company and certain of its consolidated subsidiaries provide
two types of post-employment benefit plans, lump-sum payment
plans and approved retirement pension plans, under which all
eligible employees are entitled to benefits based on their current
rate of pay, length of service and the conditions under which
termination occurs.
The liabilities and expenses for severance and retirement benefits are determined based on the amounts actuarially calculatedusing certain assumptions.
The Companies provided an allowance for employees’ severance and retirement benefits at March 31, 2005, 2004 and2003 based on the estimated projected benefit obligation
at those dates.
Actuarial gains and losses are recognized in expenses in the
succeeding period.
(14) Derivative transaction and hedge accounting
The Company and its consolidated subsidiaries state derivative
financial instruments at fair value and recognize changes in thefair value as gains or losses unless derivative financial instruments
are used for hedging purposes and qualify for hedge accounting.
If derivative financial instruments are used as hedges and meetcertain hedging criteria, the Companies defer recognition of gains

or losses resulting from changes in fair value of derivative financial instruments until the related losses or gains on the hedged
items are recognized.
However, in cases where forward foreign exchange contracts
are used as hedges and meet certain hedging criteria (regarding
foreign exchange contracts), the forward foreign exchange contracts and hedged items are accounted for in the following manner:
1. If a forward foreign exchange contract is executed 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 translatedusing the spot rate at the inception date of the contract andthe book value of the receivable or payable is recognized in
the income statement in the period which includes the
inception date; and(b) the discount or premium on the contract (that is, the difference between the Japanese yen amount of the contract
translated using the contracted forward rate and that translated using the spot rate at the inception date of the contract) is recognized over the term of the contract.
2. If a forward foreign exchange contract is executed to hedge
a future transaction denominated in a foreign currency, thefuture transaction will be recorded using the contracted forward rate, and no gains or losses on the forward foreignexchange contract are recognized.

Also, if interest rate swap contracts are used as a hedge andmeet certain hedging criteria (regarding interest rate swap contracts), the net amount to be paid or received under the interest
rate swap contracts is added to or deducted from the interest on
the assets or liabilities relative to which the swap contract was
executed as a hedge.
(15) Amounts per share of common stock
The computation of net income per share is based on the weighted-average number of shares of common stock outstanding during each year.
Diluted net income per share is computed based on theamount of net income available to the shareholders and theweighted-average number of shares of common stock outstanding during each year after giving effect to the dilutive potentialof shares of common stock to be issued upon the exercise ofstock options.
Cash dividends per share represent actual amounts applicableto the respective year.
(16) Reclassifications
Certain prior year amounts have been reclassified to conformto the 2005 presentation.
These changes had no impact on previously reported results ofoperations.

3. Cash and cash equivalents
Cash and cash equivalents at March 31, 2005 and 2004, consisted of the following:
Millions of yen

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

Thousands of
U.S. dollars

2005

2004

2005

¥103,235
2¥103,237¥132,474
2¥132,476$961,936
19$961,955

4. Inventories
Inventories at March 31, 2005 and 2004, were as follows:
Millions of yen

Land and buildings for saleLand and building projects in progress
Land held for development
Other

2005

2004

¥106,190
63,651
36,396
4,943¥211,180¥ 81,658
77,214
26,207
4,468¥189,547

Thousands of
U.S. dollars
2005$

989,471593,095
339,135
46,059$1,967,760

33

5. Investments in and advances to unconsolidated subsidiaries and affiliates
Investments in and advances to unconsolidated subsidiaries and affiliates at March 31, 2005 and 2004, consisted of the following:Thousands of
U.S. dollars

Millions of yen

Investments in common stock, at cost
Advances

2005

2004

2005

¥5,412489¥5,901¥5,948503¥6,451$50,429
4,556$54,985

6. Properties in trust
The Company has properties which are held under real estate trust contracts.
Such properties included in property and equipment in the consolidated balance sheets at March 31, 2005 and 2004, were as follows:
Thousands of
U.S. dollars

Millions of yen

Land
Buildings and structures
Machinery and equipment

For the year ended March 31, 2004, the Company sold off
properties held under real estate trust contracts to S.F. Office
Network, Ltd. (the “SPC”). However, the Company retained certain investment risk in the properties, because the Company
invested in the SPC in an amount exceeding 5% of the transfer
countervalue. Therefore, it was considered that the arrangement
was a financing transaction in accordance with the “Practical

2005

2004

2005

¥1,2361,031
1¥2,268¥17,655
5,980
62¥23,697$11,5179,607
9$21,133

Guidelines on Accounting of the Transferor for the Derecognition
of Real Estate Securitized by means of Special Purpose Companies”.
The properties were included in property and equipment orleasehold rights and other intangible assets, and ¥25,000 million
received from the SPC was included in deposits received in the
consolidated balance sheets.

Such properties at March 31, 2004, were as follows:
Millions of yen
2004

Land
Buildings and structures
Machinery and equipment
Leasehold rights and other intangible assets

In addition, the SPC offered the properties as security on¥25,000 million in loans from banks.
Such properties held under real estate trust contracts werebought back by the Company in the year ended March 31, 2005.

¥29,636
7,147
114
1,713
¥38,610The SPC repaid the loans from banks with the proceeds fromthe sale.

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

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

34

Thousands of U.S. dollars

Book value

Fair market
value

DifferenceBook value

Fair market
value

Difference

¥ 938

¥ 942

¥4

$ 8,740$ 8,777$37

305¥1,243304¥1,246

(1)
¥3

2,842
$11,582

2,833$11,610(9)$28

(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

Acquisition
cost

Book value¥58,395
103
58,498
4,974
521
5,495
¥63,993

Thousands of U.S. dollars
Difference

Acquisition
cost

Book value¥90,946
104
91,050¥32,551
1
32,552$544,120960
545,080$847,428 $303,308
969
9848,397 303,317

4,397
481
4,878
¥95,928

(577)
(40)
(617)
¥31,935

46,347
4,855
51,202$596,282

40,971(5,376)4,482(373)
45,453(5,749)$893,850 $297,568

Difference

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

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

¥

7,260
72,62240,204¥120,086

Thousands of
U.S. dollars$

67,648676,687374,618$1,118,953

Senior securities included investments in SPCs holding properties for sale amounting to ¥49,434 million ($460,622 thousand).
C. Available-for-sale securities with maturities and held-to-maturity securities at March 31, 2005, mature as follows:
Millions of yen

Bonds
Other
Total

1 year or less

1 to 5 years

5 to 10 years

Over 10 years

¥411
—
¥411

¥833
—
¥833

¥100
—
¥100

¥—
—
¥—

1 year or less

1 to 5 years

5 to 10 years

Over 10 years$3,830—$3,830$7,762—$7,762

$932
—
$932

$—
—
$—

Thousands of U.S. dollars

Bonds
Other
Total

D. Total sales of available-for-sale securities sold in the year ended
March 31, 2005 amounted to ¥731 million ($6,811 thousand) andthe related gains amounted to ¥116 million ($1,081 thousand).
E. Investments in SPCs holding properties for sale are equity
investments such as preferred subscription certificates and silent
partnership (“Tokumei Kumiai”) investments in Special Purpose
Companies (SPCs) and Tokumei Kumiai which own and develop
real estate. The Company or its subsidiaries will sell real estate inSharesAcquisition cost
Book value

The Tokyo Stock Exchange delisted the shares of Seibu Railway
Co., Ltd. on December 17, 2004. The Company stated theseshares at acquisition cost, because it is difficult for the Company
to assess the fair value of these shares. The Company is negotiating with the Seibu Railway Co., Ltd. group to withdraw the fullamount of acquisition cost.

SPCs and Tokumei Kumiai after the completion of construction.
Tokumei Kumiai are a vehicle for investment allowed under theJapanese Commercial Code.
As of March 31, 2005, investments in SPCs holding properties
for sale consisted of preferred subscription certificates issued by
SPCs.
F. The following summarizes the Company’s investments in Seibu
Railway Co., Ltd. at March 31, 2005.
Millions of yen

Thousands of
U.S. dollars

2,692
thousand¥4,0194,019$37,449
37,449G. The Company lent the securities temporarily to a financial institute under a securities lending agreement. Lent securities, included in investment securities, were ¥77,119 million ($718,589
thousand) as of March 31, 2005.

35

For 2004
A. The following tables summarize the acquisition costs, book values and fair market values of securities with available fair market values
as of March 31, 2004:(a) Held-to-maturity securities:
Millions of yen
Book value Fair market value

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

Difference

¥ 811

¥ 814

¥3

396
¥1,207392¥1,206(4)¥(1)(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

Acquisition cost

Book value

Difference¥54,868103
54,971¥80,111
112
80,223¥25,243
925,252

7,428
754
8,182
¥63,153

6,580
681
7,261
¥87,484

(848)
(73)
(921)
¥24,331

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

Unlisted equity securities
Senior securities
Total¥ 3,478
65,290¥68,768

Senior securities included investments in SPCs holding properties for sale amounting to ¥44,473 million.
C. Available-for-sale securities with maturities and held-to-maturity securities at March 31, 2004, mature as follows:
Millions of yen

Bonds
Other
Total

1 year or less

1 to 5 years

5 to 10 years

Over 10 years

¥344
500
¥844

¥863
—
¥863

¥100
—
¥100

¥—
—
¥—

D. Total sales of available-for-sale securities sold in the year ended March 31, 2004 amounted to ¥220 million and the related gains andlosses amounted to ¥11 million and ¥237 million, respectively.
E. Investments in SPCs holding properties for sale are equity
investments such as preferred subscription certificates andsilent partnership (“Tokumei Kumiai”) investments in Special
Purpose Companies (SPCs) and Tokumei Kumiai which own
and develop real estate. The Company or its subsidiaries
will sell real estate in SPCs and Tokumei Kumiai after the36

completion of construction. Tokumei Kumiai are a vehicle forinvestment allowed under the Japanese Commercial Code.
As of March 31, 2004, investments in SPCs holding properties for sale consisted of preferred subscription certificatesissued by SPCs.

8. Short-term debt and long-term debt
Short-term debt at March 31, 2005 and 2004, consisted of the following:Thousands of
U.S. dollars

Millions of yen
2005

Loans, principally from banks
Commercial paper¥132,745
40,500¥173,245

Average interest
rate (%)

0.66
0.10

2004

Average interest
rate (%)¥171,423
34,000¥205,423

0.90
0.16

2005

$1,236,908
377,376$1,614,284

The interest rates represent weighted average rates in effect at March 31, 2005 and 2004, regardless of borrowing currencies, though
the range of the interest rate varies by borrowing currency.
Long-term debt at March 31, 2005 and 2004, consisted of the following:
Millions of yen
2005

2.575% Euroyen notes (*), due 2004
3.0% domestic straight bonds, due 2004
3.1% Euroyen notes, due 2005
2.95% domestic straight bonds, due 2004
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
1.5% domestic straight bonds, due 2007
1.5% domestic straight bonds, due 2007
1.39% domestic straight bonds, due 2006
1.4% domestic straight bonds, due 2007
1.4% domestic straight bonds, due 2007
1.68% domestic straight bonds, due 2008
1.49% domestic straight bonds, due 2006
1.92% domestic straight bonds, due 2008
1.31% domestic straight bonds, due 2009
1.52% domestic straight bonds, due 2010
1.30% domestic straight bonds, due 2009
1.29% domestic straight bonds, due 2012
Loans, principally from banks and insurance companies,
interest principally at rates of 0.45% to 3.20% in 2005, and 0.51% to 4.50% in 2004:
Unsecured
Subtotal
Amount due within one year
Total

¥

—
—
700
—
—
—
15,366
—
3,100
7,390
9,500
7,844
7,510
7,360
7,337
10,000
7,557
9,409
9,377
9,057
7,147
12,00010,00010,0009,954
12,5005,000
10,00010,0007,000
20,00010,00010,0005,000
5,000
20,00020,00020,00020,000530,036
865,144(225,182)¥ 639,962

Thousands of
U.S. dollars

2004

¥

7,400
3,200
700
34,422
19,6009,321
15,366
3,580
3,100
7,390
9,500
7,844
7,510
7,360
7,337
10,000
7,557
9,409
9,377
9,057
7,147
12,00010,00010,0009,954
12,5005,000
10,00010,0007,000
20,00010,00010,000
5,000
5,000
—
—
—
—

510,575
843,206(198,242)¥ 644,964

2005

$

—
—
6,523
—
—
—
143,179—
28,886
68,85988,52073,09069,97868,58068,366
93,17970,41687,67287,37484,392
66,595
111,815
93,17993,17992,751
116,474
46,59093,17993,17965,225
186,359
93,17993,17946,59046,590186,359
186,359
186,359
186,359

4,938,837
8,061,350(2,098,230)$ 5,963,120(*) Euroyen notes = yen denominated bonds issued in the Euro market

37

The aggregate annual maturities of long-term debt at March 31, 2005, are as follows:Year ending March 31

Millions of yen

Thousands of
U.S. dollars

2006
2007
2008
2009
2010
2011 and thereafter
Total¥225,182
200,888
154,837
103,358
87,114
93,765¥865,144$2,098,230
1,871,860
1,442,760
963,082
811,722873,696$8,061,350

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

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

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

The allowance for severance and retirement benefits includedin the liability section of the consolidated balance sheets as ofMarch 31, 2005 and 2004, consisted of the following:
Millions of yen

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

Thousands of
U.S. dollars

2005

2004

2005

¥ 7,436(2,542)
105
3¥ 5,002¥ 7,286(2,422)(117)
1¥ 4,748$ 69,288(23,686)
97828$ 46,608

Included in the consolidated statements of income for the years ended March 31, 2005 and 2004, are severance and retirement
benefit expenses comprised of the following:
Millions of yen

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

The discount rates and the rates of expected return on plan
assets for the years ended March 31, 2005 and 2004, used by
the Company are 2.0%, respectively (the discount rate used by
one consolidated subsidiary is 1.5%). The estimated amount ofThousands of
U.S. dollars

2005

2004

2005

¥488
128
(47)
117
¥686

¥463
138
(50)
351
¥902

$4,547
1,193
(438)
1,090
$6,392all retirement benefits to be paid at future retirement dates isallocated equally to each service year using the estimated numberof total service years. Actuarial gains and losses are recognizedin the income statement in the next year.

10. Loss on sale and devaluation of property and equipment
As explained in Note 2(8), the new accounting standard for
impairment of fixed assets is required to be adopted in periods
beginning on or after April 1, 2005. In order to prepare for the
adoption of the standard, the Company and its subsidiaries sold
and recognized losses on certain fixed assets of ¥15,672 million($146,031 thousand) for the year ended March 31, 2005. Someof the fixed assets were sold to its consolidated subsidiaries and38

such losses incurred in these transactions were not eliminated inconsolidation but were recorded as net loss on devaluation of landor buildings. Loss on sale and devaluation of property and equipment of ¥15,672 million ($146,031 thousand) consists of net loss
on sale of land of ¥11,400 million ($106,224 thousand), loss ondevaluation of land of ¥1,672 million ($15,580 thousand) and net
loss on sale of buildings of ¥2,600 million ($24,227 thousand).

11. Directors’ retirement benefits
A performance-based executive remuneration policy was adopted
by a resolution at the 71st shareholders’ meeting, and the Company settled the retirement benefits owed directors under theprior arrangement for directors’ retirement benefits. The retirement benefits will be paid when the directors retire as both

director and executive officer. The Company recognized ¥2,015
million ($18,776 thousand) in retirement obligations at March 31,
2005 in other long-term liabilities, exclusive of the amount provided for the directors who retired as at the 71st shareholders’meeting.

12. Income taxes
The normal effective statutory income tax rate in Japan arisingout of aggregation of corporate, enterprise and inhabitant taxes
was approximately 40.69% for the year ended March 31, 2005
and approximately 42.05% for the year ended March 31, 2004.

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

The differences between the statutory tax rate and the Company’s effective tax rate for the year ended March 31, 2005 were insignificant and are not presented.
2004

Statutory tax rate
Net operating loss carryforwards of subsidiaries
Per capita inhabitant taxes
Entertainment expenses and others not deductible for tax purposes
Other
Effective tax rate

42.05%
2.31
1.50
0.90
0.54
47.30%

Details of deferred tax assets and liabilities at March 31, 2005 and 2004, were as follows:
Millions of yen

Thousands of
U.S. dollars

2005

2004

2005

Deferred tax assets:
Net operating loss carryforwards
Loss from devaluation of inventories
Allowance for employees’ severance and retirement benefits
Unrealized inter-company profits
Accrued bonuses
Accrued enterprise tax and business office tax
Accrued directors’ retirement benefits
Allowance for doubtful accounts
Other
Subtotal of deferred tax assets
Valuation allowance
Total deferred tax assets¥ 8,050
1,939
1,985
1,545
1,332
833
820
600
5,625
22,729(8,531)
14,198¥ 15,722
5,094
1,845
1,525
1,219
—
—
—
4,875
30,280(10,497)
19,783$ 75,009
18,067
18,496
14,396
12,411
7,762
7,641
5,591
52,413211,786(79,491)
132,295

Deferred tax liabilities:
Net unrealized holding gains on securities(13,079)(9,962)(121,869)¥ 1,119¥ 9,821$ 10,426

Net deferred tax assets

The aggregate statutory income tax rate was reduced for theyears commencing on April 1, 2004 or later due to the revised
local tax law. At March 31, 2004, the Company and consolidated
domestic subsidiaries applied the reduced aggregate statutory

income tax rate of 40.69% for calculating deferred tax assets
and liabilities that were expected to be recovered or settled after
March 31, 2005.

39

13. Guarantee and other deposits received
Guarantee and other deposits received at March 31, 2005 and 2004, were as follows:
Thousands of
U.S. dollars

Millions of yen
2005

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

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

Average interest
rate (%)

2004

Average interest
rate (%)

2005¥159,830
34,042
193,872—
0.18¥131,015
50,442
181,457—
0.25$1,489,284
317,201
1,806,485

160,273———

145,857
22,500—2.80

1,493,412—

241,545
26,000427,818¥621,690—
0.80

203,103
26,000397,460¥578,917—
0.79

2,250,699
242,266
3,986,377$5,792,862

As explained in Note 6, ¥25,000 million received from the SPC related to the sale of properties was included in deposits received on
March 31, 2004.
The aggregate annual maturities of interest-bearing guarantee and other deposits received at March 31, 2005, are as follows:Year ending March 31

Millions of yen

Thousands of
U.S. dollars

2006
2007
2008
2009
2010
2011 and thereafter¥34,042
20,0006,000———¥60,042$317,201
186,358
55,908———$559,467

14. Shareholders’ equity
Under the Commercial Code of Japan, the entire amount of theissue price of shares is required to be accounted for as capital,
although a company may, by resolution of its Board of Directors,
account for an amount not exceeding one-half of the issue priceof the new shares as additional paid-in capital, which is included
in capital surplus.
The Commercial Code provides that an amount equal to atleast 10% of cash dividends and other cash appropriations shallbe appropriated and set aside as a legal earnings reserve until the
total amount of the legal earnings reserve and additional paid-in
capital equals 25% of common stock. The total amount of thelegal earnings reserve and additional paid-in capital of the Company has reached 25% of common stock, and therefore theCompany is not required to provide additional legal earnings
reserve. The legal earnings reserve and additional paid-in capital
may be used to eliminate or reduce a deficit by resolution of the40

shareholders’ meeting or may be capitalized by resolution of theBoard of Directors. On condition that the total amount of thelegal earnings reserve and additional paid-in capital remains equal
to or exceeding 25% of common stock, they are available for distribution by the resolution of the shareholders’ meeting. The legal
earnings reserve is included in retained earnings in 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 in accordance with the Commercial Code.
Effective April 1, 2002, the Company adopted the new accounting standard for treasury stock and reversal of statutory reserves(Accounting Standards Board Statement No. 1, “AccountingStandard 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 that do not transfer ownership to lessees are not capitalized and accounted for in the same manner as operating leases.
Certain information for such non-capitalized finance leases is as follows.
As Lessee
A summary of the pro-forma amounts (inclusive of interest) of acquisition cost, accumulated depreciation and net book value at March
31, 2005 and 2004, was as follows:
Thousands of
U.S. dollars

Millions of yen

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

Pro-forma depreciation equivalents of ¥2,444 million ($22,773
thousand) and ¥2,477 million for the years ended March 31, 2005
and 2004, respectively, were computed using the straight-line
method over the lease terms assuming no residual value or residual indemnity.

2005

2004

2005

¥15,177
2,463(6,541)¥11,099¥15,300
1,871(5,079)¥12,092$141,418
22,950(60,948)$103,420

Lease expenses under finance leases, inclusive of interest, forthe years ended March 31, 2005 and 2004 amounted to ¥2,444
million ($22,773 thousand) and ¥2,477 million, respectively.
Future lease payments and receipts under such finance leases
and non-cancelable operating leases at March 31, 2005 and2004, were as follows:
Thousands of
U.S. dollars

Millions of yen
2005

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

¥

2004

2005

2,279
8,820
¥ 11,099

¥

2,268
9,824
¥ 12,092

$

¥

4
14
18

¥

—
—
—

$

4
14
18

¥

7
—
7

$

¥

¥
¥

¥

¥

21,23682,184$ 103,420

$

$

37
131
168

37
131
168

¥ 15,740
107,028¥122,768¥ 14,447
142,679¥157,126$ 146,664
997,279$1,143,943

¥

¥

$

¥

103
498
601

¥

112
576
688

$

960
4,640
5,600

41

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

The Companies evaluate hedge effectiveness by comparing the
cumulative changes in cash flows from or the changes in fairvalue of hedged items and the corresponding changes in thehedging derivative instruments.
The evaluation of hedge effectiveness of interest rate swap
contracts for the years ended March 31, 2005 and 2004 was not
required as special hedge accounting has been applied to derivative transactions of interest rate swap contracts. Also, the evaluation of hedge effectiveness of foreign exchange forward contracts
for the years ended March 31, 2005 and 2004 was not required
because the significant terms of the hedging instruments andthose of the hedged items were the same, and the risk ofchanges in foreign exchange rates were effectively hedged.
The contract amounts and unrealized gains or losses of outstanding derivative transactions at March 31, 2005 and 2004
were not disclosed because all derivative transactions were usedas hedges and hedge accounting was applied.

Bank loans, bonds,
and deposits

17. Segment information
The Company and its consolidated subsidiaries mainly operate their business in five segments: leasing of buildings, apartments,and other properties; sale of condominiums; construction of housing and buildings; brokerage business; and other business.
Information by industry segments for the years ended March 31, 2005, 2004 and 2003 is summarized as follows:
Millions of yen

42

Elimination
and/orcorporate

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

Leasingbusiness

Salesbusiness

Construction Brokeragebusinessbusiness

Otherbusiness

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

II Identifiable assets, depreciation
expense and capital expenditures:
Identifiable assets
Depreciation expense
Capital expenditures¥1,538,469
13,058111,577¥293,260
111
262¥ 17,755
120
296¥ 7,935275
329¥48,473
81
111¥1,905,892
13,645112,575¥230,437374
898

Consolidated— ¥ 616,115(11,727)—(11,727)
616,115(433)
515,824¥ (11,294) ¥ 100,291¥2,136,329
14,019113,473

Millions of yen
Elimination
and/orcorporate

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

Leasingbusiness

Salesbusiness

Construction Brokeragebusinessbusiness

Otherbusiness

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

II Identifiable assets, depreciation
expense and capital expenditures:
Identifiable assets
Depreciation expense
Capital expenditures¥1,481,757
11,211
33,470¥261,679
93
473¥ 26,024165
165¥17,694291
356¥91,21691
90¥1,878,370
11,851
34,554¥212,600360
312¥2,090,970
12,211
34,866

Total

Elimination
and/orcorporate

Consolidated

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

Millions of yen

For 2003
I Net sales and operating income:Net sales
Customers
Intersegment
Total
Costs and expenses
Operating income
II Identifiable assets, depreciation
expense and capital expenditures:
Identifiable assets
Depreciation expense
Capital expenditures

Leasingbusiness

Salesbusiness

Construction Brokeragebusinessbusiness

Otherbusiness¥ 191,215
1,764
192,979
139,718¥ 53,261¥183,729
16
183,745
157,958¥ 25,787¥114,206
10,258124,464
117,472¥ 6,992¥37,335 ¥ 7,430
242
3,862
37,577
11,292
29,785
10,621¥ 7,792 ¥671¥ 533,915
16,142550,057
455,554¥ 94,503¥¥1,517,653
11,11447,596¥211,066
94359¥ 21,436
158
451¥34,452 ¥106,621
248
80
259
174

¥1,891,228
11,694
48,839¥124,439279
805¥2,015,667
11,97349,644

Total

Elimination
and/orcorporate

Consolidated— ¥ 533,915(16,142)—(16,142)533,915(10,151)445,403¥ (5,991) ¥ 88,512

Thousands of U.S. dollars
Leasingbusiness

Salesbusiness

Construction Brokeragebusinessbusiness

Otherbusiness

For 2005
I Net sales and operating income:Net sales
Customers
Intersegment
Total
Costs and expenses
Operating income$ 2,044,223 $2,088,996 $1,139,554 $400,233 $ 67,909 $ 5,740,915 $— $ 5,740,915
17,219—47,4384,584
40,030109,271(109,271)—
2,061,442 2,088,996 1,186,992 404,817 107,939
5,850,186(109,271) 5,740,915
1,540,868 1,787,514 1,108,442 279,128
94,4934,810,445(4,034) 4,806,411$ 520,574 $ 301,482 $ 78,550 $125,689 $ 13,446 $ 1,039,741 $ (105,237) $ 934,504

II Identifiable assets, depreciation
expense and capital expenditures:
Identifiable assets
Depreciation expense
Capital expenditures$14,335,343 $2,732,575 $ 165,440 $ 73,938 $451,668 $17,758,964 $2,147,195 $19,906,159
121,674
1,034
1,118
2,562
755
127,143
3,485
130,628
1,039,667
2,441
2,758
3,066
1,034
1,048,966
8,367
1,057,333

Distributions from SPCs and partnerships that operate realestate leasing business are included in net sales of the “Leasing
business”.
The Company classified expenses and assets of the generaladministrative division in certain consolidated subsidiaries tounallocatable operating expenses and corporate assets in thesegment information for the year ended March 31, 2005.
Under a new management policy, the Company compares thecontribution levels of the business operations between each segment more promptly, clearly, and easily.

43

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

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

18. Contingent liabilities
At March 31, 2005, the Company and its consolidated subsidiaries were contingently liable as guarantors of borrowings bycustomers and others in an amount aggregating to ¥937 million($8,731 thousand).
Also, at March 31, 2005, the Company and its consolidated
subsidiaries had outstanding commitments to guarantee loans ofcustomers and others amounting to ¥9 million ($84 thousand).
(Lawsuits)
The Company was a defendant in the following lawsuits, in which,based on the Leased Land and House Lease Law, the Company
claimed reductions of the rental payments that it owed.
Two lawsuits are pending in court.
A lawsuit was brought in the Tokyo District Court against theCompany in 1994 (Case A) and another one in 1995 (Case B),
relating to claims to recover the difference between the rental

payments based on the lease agreements and the amounts theCompany paid taking a position under the Leased Land andHouse Lease Law. While the District Court issued judgments
against the Company in August and October of 1998, theCompany appealed to the Tokyo Higher Court in September andNovember of 1998 as the Company believed that the judgments
were contradictory to previous legal interpretations.
In Case B, the Tokyo Higher Court issued a judgment for theCompany in October of 1999. The lessor appealed to theSupreme Court in November of 1999.
In Case A, the Tokyo Higher Court issued a judgment against
the Company in January of 2000 that the Company believed wascontradictory to previous legal interpretations. The Company
appealed to the Supreme Court in January of 2000.
In October of 2003, the Supreme Court reversed the judgments
and remanded both cases to the Tokyo Higher Court.

19. Subsequent events
The Company issued ¥30,000 million ($279,538 thousand) in
1.28% domestic straight bonds due 2012 on April 25, 2005.
On June 29, 2005, the shareholders of the Company approved
payments of a year-end cash dividend of ¥9 ($0.08) per share or a
total of ¥4,278 million ($39,860 thousand) to shareholders ofrecord at March 31, 2005.
At June 17, 2005, the Board of Directors resolved the sale of
60% ownership of the Shinjuku Sumitomo Building (the“Building”). The summary of the sale is as follows.
(1) The reason of the sale:
In March 2000, the Company placed the Building in trust to
Sumitomo Trust & Banking Co., Ltd. and sold the primary beneficiary right that had a priority to receive earnings to Prime Quest
Co., Ltd. (“PQ1”). The Company retained the secondary beneficiary right to receive the remainder after distributions to the first
beneficiary.
After reacquiring the first beneficiary right, the Company will
dispose of the Building because the corporate bond that PQ1
issued with the first beneficiary right as an underlying security
asset will reach its maturity date.

44

After selling the Building, the Company will continue the leasebusiness under a master lease agreement.
(2) The property for sale:
Name of property: Shinjuku Sumitomo Building (60% ownership)
Sales price: ¥90 billion ($839 million)
Cost of sales: ¥74.8 billion ($697 million)(3) Party of sale:
Corporate name: Prime Quest Three Co., Ltd.
Address of head office: Chiyoda-ku, Tokyo, Japan(4) Schedule of sale:
Date of contract: June 17, 2005
Delivery date: June 30, 2005
(5) Effect on income:
The Company expects to recognize a gain on sale of fixed assets
of approximately ¥15 billion ($140 million) in the next fiscal year.

Independent Auditors’ Report

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. and consolidated subsidiaries as of March 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows foreach of the three years in the period ended March 31, 2005, expressed in Japanese yen. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to independently express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Sumitomo Realty & Development Co., Ltd. and subsidiaries as of March 31, 2005 and 2004, and the consolidated results of
their operations and their cash flows for each of the three years in the period ended March 31, 2005, in conformity with accounting
principles generally accepted in Japan.
Without qualifying our opinion, we draw attention to the following.
(1) As discussed in Note 17 to the consolidated financial statements, effective April 1, 2004, Sumitomo Realty & Development Co., Ltd.
changed the allocation method of common corporate expenses and corporate assets.
(2) As discussed in Note 19 to the consolidated financial statements, Sumitomo Realty & Development Co., Ltd. resolved the sale of the
Shinjuku Sumitomo Building in the Board of Directors meeting on June 17, 2005.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2005 arepresented solely for convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts and, in our opinion,such translation has been made on the basis described in Note 1 to the consolidated financial statements.

Tokyo, Japan
June 30, 2005

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

45

Board of Directors and Auditors(As of June 29, 2005)

Chairman of the Board
Shinichiro Takagi*
President & Chief Executive Officer
Junji Takashima*
Director & Advisor
Taro Ando*
Directors & Senior Managing Executive Officers
Tetsuro Tsuruta*
Masayoshi Ohashi*
Kenichi Onodera*
Kenichiro Sugimoto
Kazuo Masuoka
Senior Managing Executive Officer
Yoshifumi Nakamura
Senior Executive Officers
Shozo Suzuki
Haruo Fukumuro
Kenichi Kameyama
Tsutomu Oyama
Hiroyuki Asano

Executive Officers
Takahiro Daisaka
Akira Murakami
Yoshiteru Nishimoto
Naoyoshi Matsugami
Takashi Saito
Masayuki Takahashi
Masaki Ogawa
Yoshiya Unno
Yoshinobu Sakamoto
Nobuaki Takemura
Koji Ito
Toshikazu Tanaka
Masato Kobayashi
Kojun Nishima
Yoshiyuki Odai
Hisatoshi Katayama
Masumi Aoki
Statutory Auditor
Shinsaku Sanmoto
Standing Statutory Auditors
Ryoichi Nomura
Chuji Kitamura
Kunio Kobayashi* Representative Director

Corporate Data
(As of March 31, 2005)

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

46

Number of Employees
7,246 (Consolidated)
Major Consolidated Subsidiaries
Sumitomo Real Estate Sales Co., Ltd.
Sumitomo Fudosan Syscon Co., Ltd.
Sumitomo Fudosan Tatemono Service Co., Ltd.
Sumitomo Fudosan Esforta Co., Ltd.
Sumitomo Fudosan Finance Co., Ltd.
Izumi Restaurant Co., Ltd.
Universal Home Inc.

47

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

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

Printed in Japan
Printed on recycled paper