Elliott plans to vote against members of Sumitomo Realty's senior management at the 2025 AGM absent further corporate-governance and value-enhancement initiatives
LONDON, June 9, 2025 -- Elliott Investment Management, L.P. and Elliott Advisors (UK) Limited ("Elliott"), which advise funds that together have a more than 3% ownership stake in Sumitomo Realty & Development Co., Ltd. ("Sumitomo Realty" or the "Company"), making it one of the Company's largest shareholders, today released an open letter to the Company's shareholders.
In the letter, Elliott encouraged fellow shareholders to actively engage with Sumitomo Realty's management ahead of the upcoming 2025 Annual General Meeting of Shareholders ("AGM") and to hold the Company accountable for not addressing its long-standing valuation discount and weak corporate governance. The letter outlines four key areas of concern – poor shareholder returns, excessive cross shareholdings, declining capital efficiency and subpar governance – and urges the Company to implement tangible reforms. These include increasing its shareholder payout, reducing cross shareholdings, issuing a credible return target and enhancing governance. Elliott also emphasized that without meaningful progress from Sumitomo Realty, it intends to vote against the reappointment of senior management at the upcoming AGM.
The full text of the letter can be read at https://elliottletters.com and is included below:
Dear Fellow Sumitomo Realty Shareholders,
Elliott Investment Management, L.P. and Elliott Advisors (UK) Limited ("Elliott," or "we") advise funds that together have a more than 3% ownership stake in Sumitomo Realty & Development Co., Ltd. ("Sumitomo Realty", or the "Company"), which makes us one of the Company's largest shareholders. For months, we have engaged in private discussions with Sumitomo Realty management to express our conviction in the value-creation opportunity at the Company and to outline tangible actions to realize this potential. With the 2025 Annual General Meeting of Shareholders ("AGM") approaching, we are now making our views public because these issues are critical to the Company's future success, and we want our fellow shareholders to be able to assess the same views we have presented to the Company ahead of the 2025 AGM.
We believe the 2025 AGM marks a critical juncture for evaluating management's performance over the past two years. We are encouraging investors to actively engage with Sumitomo Realty management ahead of the 2025 AGM and to use their voting rights to express their satisfaction or dissatisfaction with the Company's current strategy. We highlight recent opinions from ISS and Glass Lewis, who both recommended a vote against the reappointment of Sumitomo Realty's Chairman, due to the Company's high levels of cross shareholdings and lack of board independence.
Sumitomo Realty is one of Japan's leading real estate developers, with a dominant position in Tokyo office real estate, an attractive business mix and a high-quality portfolio of assets. Our substantial investment reflects our conviction, based on months of thorough diligence, in Sumitomo Realty's strengths. However, despite these advantages, Sumitomo Realty trades at just half of the post-tax market value of its real estate ("PNAV"),1 making it the most undervalued real estate developer in Japan. Sumitomo Realty also trades at a depressed multiple of earnings, despite its stable, high-quality core office leasing business.
Sumitomo Realty's persistent stock underperformance and valuation discount are not coincidental. The Company is an outlier in several areas: it holds a large portfolio of cross shareholdings, it has a unique policy of not selling property assets or managing REIT assets, and its board and governance structure rank near the bottom of all TOPIX 100 companies on several metrics2. In our view, these self-imposed problems and others we highlight below are responsible for the Company's significant undervaluation.
We see a clear opportunity for Sumitomo Realty to close its discount to fair value by taking steps to resolve these issues. The upside potential is significant: Applying a peer-average PNAV multiple – a conservative approach given Sumitomo Realty's superior asset quality – would imply a share price of just under ¥8,000, over 40% higher than the current level.
See Chart 1 – PNAV and Price Target Bridge.
The Case for Change
The market's negative sentiment toward Sumitomo Realty reflects deep shareholder concerns with the Company's performance. In 2024, Elliott commissioned a third-party shareholder perception study to better understand investor views on the Japanese real estate developer sector, including Sumitomo Realty and its large-cap peers. This study surveyed large and mostly long-term institutional investors, both in Japan and abroad, on topics including the Company's strategy, its shareholder-return policy and its cross-shareholding policy. The study's findings – as well as sell-side analyst ratings, expert commentary and AGM voting results – show consistently poor investor sentiment toward Sumitomo Realty and highlight meaningful opportunities for improvement.
See Chart 2 – Shareholder Survey.
Evidence of shareholder dissatisfaction is also clearly visible in the AGM approval rate for Sumitomo Realty's Board. Approval rates have steadily declined since 2017, with the Chairman's approval rating falling from 95% to a record-low 77% by 2023 – the lowest among peers.
See Chart 3 – AGM Approval Rating.
Publicly available proxy voting data shows that many of Sumitomo Realty's largest investors have already voted against management at previous AGMs. Their concerns center on Sumitomo Realty's excessive cross shareholdings and its antiquated board structure. With proxy voting guidelines from asset managers growing more stringent since the Board last stood for election in 2023, and with independent proxy advisory firms recently making recommendations to vote against the reappointment of Sumitomo Realty's Chairman at the 2025 AGM, it appears that continued inaction could lead to Sumitomo Realty's Board facing even broader disapproval from major asset managers this year.
Diagnosing the Key Issues
Four core issues underlie Sumitomo Realty's deep undervaluation and poor investor sentiment:
- Weak shareholder returns: Sumitomo Realty's dividend payout was just 17% of net income in the last fiscal year – half the peer group average. Larger peers have moved more aggressively on shareholder returns, with one key peer expecting its shareholder payout to exceed 80% of net income this fiscal year. Even with Sumitomo Realty's recently outlined plans to increase its shareholder payout, the pace of increase is too slow: we estimate it could take almost a decade to achieve the Company's target dividend payout ratio of 35%.
- Excessive cross shareholdings: At 26% of net assets as of March 31, 2025, Sumitomo Realty's cross shareholdings far exceed those of its peers as well as the maximum levels set by independent proxy advisory firms and key Japanese asset managers. The Company's high level of cross shareholdings was a major cause of shareholder disapproval at the 2023 AGM and will likely be a decisive issue again in 2025.
- Declining capital efficiency: Sumitomo Realty is the only company in its peer group that does not have a Return on Equity ("ROE") target, nor any clear strategy for maintaining or improving its ROE, such as by selling mature assets into a REIT structure. As a result, the Company's ROE has declined for six consecutive years and is forecast to continue falling.
See Chart 4 – ROE. - Poor corporate governance and board structure: Sumitomo Realty ranks near the bottom of the TOPIX 100 on corporate-governance metrics. A global company with the size and stature of Sumitomo Realty should aspire to market-leading governance standards. While the Company has recently outlined plans to gradually improve its governance, progress on these reforms can and should be accelerated.
See Chart 5 – Corporate Governance Comparison.
Setting the Right Course
These issues are largely self-imposed and can be addressed quickly and decisively by management. Specifically, we believe that the Company should take the following steps:
- Shareholder return: Immediately increase its shareholder payout ratio to 50% or more, a level that is in-line with its peers, via a higher dividend payout and larger and more regular share repurchases;
- Cross shareholding: Decrease its cross-shareholdings portfolio, which we believe is worth more than ¥500 billion on a post-tax basis, to below 10% of net assets (based on current market value) by the end of its current medium-term management plan ("MTMP") period;
- ROE target: Set a ROE target of at least 10% and outline clear plans to achieve this target, such as by shifting capital from mature projects to growth projects. For instance, the Company could unlock ¥500 billion of capital by transferring rental apartment assets into a REIT structure; and
- Governance: Strengthen governance by adding independent directors and establishing a nomination and remuneration committee.
The time to implement a more ambitious policy to unwind cross shareholdings is now. Several large holders of Sumitomo Realty shares – including Taisei Corp, Obayashi, Shimizu and Kajima, which collectively own more than ¥160 billion worth – have announced plans to aggressively sell their cross shareholdings. Sumitomo Realty reciprocally owns more than ¥60 billion worth of shares in these four construction companies.
This dynamic presents a compelling opportunity for Sumitomo Realty: It can unlock significant capital by selling shares in these four firms and use the proceeds to repurchase a portion of the Sumitomo Realty shares they currently hold. Such a transaction would reduce cross shareholdings and deploy capital back into the Company's own shares at extremely attractive levels.
While cross shareholdings have historically been seen as promoting business relationships across Japanese companies, they are now viewed as a poor use of capital and an enabler of corporate leadership entrenchment. Sumitomo Realty and its key cross shareholders are meant to adhere to the Corporate Governance Code, which requires Japanese companies to scrutinize the purpose and benefits of cross shareholdings, particularly those held for business relationships, which are increasingly viewed as inappropriate. We believe the Company should act decisively and expeditiously to unwind its cross-shareholdings portfolio.
See Chart 6 – Key Corporate Cross Shareholding.
The steps we have outlined would not only raise management's standing at the 2025 AGM, but also improve Sumitomo Realty's valuation. In the Japanese real estate developer sector, there is a clear relationship between valuation (PNAV), capital efficiency (ROE) and shareholder returns. We are confident that taking the steps above – particularly on improving shareholder payout and capital efficiency – will unlock significant value for Sumitomo Realty shareholders and increase management's credibility with shareholders ahead of the 2025 AGM.
See Chart 7 – ROE and Shareholder Returns Explain Valuation.
Companies that have proactively embraced Japan's ongoing corporate reforms – by unwinding cross shareholdings, improving capital efficiency, increasing shareholder returns and strengthening governance – have been rewarded with higher valuations and greater shareholder support. Examples from the general construction, non-life insurance, and real estate developer sectors show how such reforms can successfully unlock value and transform investor perception at previously underperforming companies.
Conclusion
We appreciate that in recent months, Sumitomo Realty management has taken several initial steps in the right direction – some of which are aligned with our recommendations. However, progress has been insufficient and too slow. The market reacted negatively to the uninspiring MTMP released in late March, which failed to address core issues. Many of our suggestions remain ignored.
The 2025 AGM is a critical opportunity for shareholders to express their satisfaction or dissatisfaction with Sumitomo Realty's current strategy. Management's approval rating is the clearest and most effective way for shareholders to catalyse change. Despite the modest shareholder-friendly actions taken to date, there remains deep skepticism, including from Elliott, about management's genuine commitment to ambitiously and decisively address the Company's key issues. As such, absent further value- and governance-enhancing measures from Sumitomo Realty, Elliott plans to vote against the reappointment of senior management at the 2025 AGM.
We urge all shareholders to carefully consider their voting decisions and engage with Sumitomo Realty management in the lead up to the AGM. Your vote can shape the Company's future. We are hopeful management will be attentive to shareholder viewpoints and will take decisive steps to raise Sumitomo Realty's corporate value and enhance its governance.
Sincerely,
Aaron Tai
Portfolio Manager
Elliott Investment Management, L.P.
About Elliott
Elliott Investment Management L.P. (together with its affiliates, "Elliott") manages approximately $72.7 billion in assets as of December 31, 2024. Founded in 1977, it is one of the oldest funds under continuous management. The Elliott funds' investors include pension plans, sovereign wealth funds, endowments, foundations, funds-of-funds, high net worth individuals and families, and employees of the firm. Elliott Advisors (UK) Limited is an affiliate of Elliott Investment Management L.P.
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