<PAGE> 1
LONGLEAF PARTNERS REALTY FUND
July 8, 1996
TO OUR SHAREHOLDERS:
We are pleased to report that Longleaf Partners Realty Fund was the #1
PERFORMING REAL ESTATE MUTUAL FUND for the FIRST QUARTER, SECOND QUARTER, and
FIRST HALF OF 1996 according to Lipper Analytical Services, Inc., which tracks
50 mutual funds with similar objectives. Longleaf Partners Realty Fund's net
asset value increased by 7.8% in the second quarter and is up 16.9% since the
Fund began operations on January 2. As shown below, the Fund also outperformed
both its primary benchmark, the Wilshire Real Estate Securities Index and its
secondary benchmark, the NAREIT Index:
<TABLE>
<CAPTION>
WILSHIRE
LONGLEAF PARTNERS REAL ESTATE NAREIT
REALTY FUND* SECURITIES INDEX* INDEX*
----------------- ----------------- ------
<S> <C> <C> <C>
Last six months (since inception) 16.9% 9.3% 7.1%
Last quarter 7.8% 4.8% 4.5%
</TABLE>
The principals of Southeastern Asset Management, Inc., advisor to Longleaf
Partners Realty Fund, seeded the portfolio with $7.4 million when the Fund began
operations at the beginning of this year. Subsequently, that commitment has been
increased to over $15 million.
Since we have so many new shareholders, we thought it would be useful to restate
the philosophy behind Longleaf Partners Realty Fund. We strongly believe that
there are many compelling long-term investment opportunities in the diverse real
estate arena, and that over time, this world will shift dramatically from
private to public ownership. By applying the same value disciplines that have
served us well over the past 20 years, we are highly confident that we can turn
Longleaf Partners Realty Fund into another successful vehicle for compounding
capital. We will strive to own financially sound, above average businesses when
they are run by highly competent, trustworthy, and properly incented management
teams. Furthermore, we will invest in these companies only when we can buy their
shares at significant discounts to our appraisal of their business values. We
believe the existing positions in your portfolio meet these investment criteria.
Unlike most real estate funds which primarily invest in REITs and focus on
maximizing pre-tax dividend yields, Longleaf Partners Realty Fund seeks to
maximize long-term TOTAL RETURN. To achieve this end we will pursue any company,
REIT or otherwise, which has attractively priced real estate assets. As an
example, Hilton Hotels, a non-REIT hotel operating company with significant real
estate assets, has been our largest single contributor to performance
year-to-date. We will continue to spend the majority of our time evaluating
individual businesses and their managements to find the very best available
investment opportunities.
Longleaf Partners Realty Fund reached $25 million in assets on June 24, 1996 and
qualified for media listing with other mutual funds under the symbol "LLREX." At
the same time, The Wall Street Journal, USA Today, and other major newspapers
began listing our daily closing net asset value along with Longleaf Partners
Fund and Longleaf Partners Small-Cap Fund under the Longleaf Partners' heading
in the mutual fund section of the paper.
We welcome all of our new shareholders. We look forward to a long and successful
investment partnership.
Sincerely,
/s/ C.T. Fitzpatrick, CFA O. Mason Hawkins /s/ G. Staley Cates,
- ------------------------- --------------------- ----------------------
Co-Portfolio Manager O. Mason Hawkins G. Staley Cates, CFA
Co-Portfolio Manager Co-Portfolio Manager
- --------------------------------------------------------------------------------
* Fund returns and those of the Wilshire Real Estate Securities Index and the
NAREIT Index are shown with all dividends reinvested. The stock market indices
shown are unmanaged. Past investment performance is no guarantee of future
investment performance, and the value of an investment when redeemed may be
more or less than the purchase price.
- --------------------------------------------------------------------------------
<PAGE> 2
- ---------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT JUNE 30, 1996 (UNAUDITED)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES COMMON STOCK (83.4%) MARKET VALUE
------- ------------
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES (2.4%)
14,500 * White River Corporation.................................... $ 679,688
------------
FURNITURE (2.7%)
69,000 * Rhodes, Inc................................................ 767,625
------------
INSURANCE AND BROKERAGE (2.5%)
35,000 Alexander & Alexander Services Inc......................... 691,250
------------
PUBLISHING (1.6%)
6,000 Knight-Ridder, Inc......................................... 435,000
------------
REAL ESTATE INDUSTRY (74.2%)
19,200 Alexander & Baldwin, Inc................................... 463,200
34,000 Burnham Pacific Properties, Inc............................ 395,250
59,900 Bay View Capital Corp...................................... 2,036,600
42,000 * Castle & Cooke, Inc........................................ 672,000
104,200 Cousins Properties Incorporated............................ 2,044,925
44,000 Essex Property Trust....................................... 946,000
63,000 * FirstFed Financial Corp.................................... 1,094,625
16,900 Forest City Enterprises, Inc. - Class A.................... 692,900
38,000 Forest City Enterprises, Inc. - Class B.................... 1,581,750
33,000 The Horsham Corporation.................................... 457,875
28,000 Louisiana-Pacific Corporation.............................. 619,500
48,000 The Pioneer Group, Inc..................................... 1,284,000
35,000 * Quaker City Bancorp, Inc................................... 479,062
35,000 Rayonier Inc............................................... 1,330,000
12,500 Reckson Associates Realty Corp............................. 412,500
139,500 Sizeler Property Investors, Inc............................ 1,220,625
292,000 * Trizec Corporation Ltd..................................... 2,226,500
28,000 * USG Corporation............................................ 780,500
68,000 Wolohan Lumber Co.......................................... 697,000
62,000 Zurn Industries, Inc....................................... 1,286,500
------------
20,721,312
------------
TOTAL COMMON STOCKS (COST $22,044,775).................................. 23,294,875
SHORT TERM OBLIGATIONS (17.3%)
Certificates of Deposit in Thrift Institutions.......................... 19,000
Passbook Savings Deposits in Thrift Institutions........................ 123,000
Repurchase Agreement with State Street Bank and Trust Company, dated
6-28-96 due 7-1-96 at 4.75%, collateralized by $4,794,394 U.S.
Treasury Bond due 11-15-15 (Repurchase proceeds-$4,695,858) (Cost
$4,694,000)............................................................ 4,694,000
------------
4,836,000
------------
TOTAL INVESTMENTS (COST $26,880,775)* *.................................... 100.7% 28,130,875
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................. (.7) (209,352)
----- ------------
NET ASSETS................................................................. 100.0% $27,921,523
===== =============
NET ASSET VALUE PER SHARE (OFFERING AND REDEMPTION PRICE PER SHARE) BASED ON
2,389,087 SHARES OUTSTANDING AT JUNE 30, 1996................................... $11.69
</TABLE>
* Non-income producing security
* * Also represents aggregate cost for Federal income tax purposes
See Notes to Financial Statements.
<PAGE> 3
- ---------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
STATEMENT OF ASSETS AND LIABILITIES
AT JUNE 30, 1996 (UNAUDITED)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments:
Securities, at market value (cost $22,044,775) (Note 1 and Note 7).......... $ 23,294,875
Repurchase agreement (Note 6)............................................... 4,694,000
Deposits in thrift institutions............................................. 142,000
------------
TOTAL INVESTMENTS 28,130,875
Cash.......................................................................... 788
Dividends and interest receivable............................................. 39,023
Prepaid insurance............................................................. 2,499
------------
TOTAL ASSETS 28,173,185
------------
LIABILITIES:
Payable for:
Securities purchased........................................................ 224,700
Investment Counsel fee (Note 2)............................................. 7,078
Administration fees (Note 3)................................................ 6,363
Other accrued expenses........................................................ 13,521
------------
TOTAL LIABILITIES 251,662
------------
NET ASSETS $ 27,921,523
============
Composition of net assets:
Paid-in capital (unlimited number of shares authorized,
2,389,087 shares outstanding)............................................ $ 26,105,559
Undistributed net investment income......................................... 113,707
Accumulated net realized gain............................................... 452,157
Unrealized appreciation of investments (Note 7)............................. 1,250,100
------------
NET ASSETS $ 27,921,523
============
NET ASSET VALUE (OFFERING AND REDEMPTION PRICE) PER SHARE
($27,921,523 DIVIDED BY 2,389,087 SHARES)................................... $11.69
======
</TABLE>
See Notes to Financial Statements.
<PAGE> 4
- ---------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends.................................................................... $ 145,233
Interest..................................................................... 63,926
-----------
209,159
-----------
EXPENSES:
Investment Counsel fee (Note 2).............................................. 63,635
Registration and filing fees................................................. 27,742
Reimbursable administration expenses (Note 3)................................ 13,225
Custodian fee................................................................ 10,948
Trustees' fees............................................................... 9,862
Professional fees............................................................ 8,384
Printing..................................................................... 6,655
Administration fee (Note 3).................................................. 6,363
Insurance expense............................................................ 1,566
Transfer agent fee........................................................... 1,163
Supplies and postage......................................................... 493
Miscellaneous................................................................ 1,973
Less: Fee reduction (Note 2)................................................. (56,557)
-----------
95,452
-----------
Net investment income................................................ 113,707
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain from securities transactions, net:
Proceeds from sales....................................................... 1,599,362
Cost of securities sold................................................... 1,147,205
-----------
Net realized gain.................................................... 452,157
Increase in unrealized appreciation for the period, net...................... 1,250,100
-----------
Net realized and unrealized gain on investments...................... 1,702,257
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................... $ 1,815,964
===========
</TABLE>
See Notes to Financial Statements.
<PAGE> 5
- ---------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
OPERATIONS:
Net investment income...................................................... $ 113,707
Net realized gain on investments........................................... 452,157
Net unrealized appreciation for the period................................. 1,250,100
-----------
Net increase in net assets resulting from operations.................... 1,815,964
-----------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares........................................... 26,110,559
Cost of shares redeemed.................................................... (5,000)
-----------
Net increase in net assets from fund share transactions................. 26,105,559
-----------
Total increase in net assets............................................ 27,921,523
NET ASSETS:
Beginning of period........................................................ 0
-----------
End of period (including undistributed net investment income of
$113,707)............................................................... $27,921,523
===========
</TABLE>
See Notes to Financial Statements.
<PAGE> 6
- ---------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Longleaf Partners Realty Fund (the "Fund") is a series of Longleaf Partners
Funds Trust, a Massachusetts business trust which is registered under the
Investment Company Act of 1940, as amended. The Fund is a non-diversified
open-end management investment company. The Fund was formed and funded on
January 2, 1996. Initial capitalization of $100,000 was provided by a principal
of Southeastern Asset Management, Inc., the Investment Counsel, who received
10,000 shares of beneficial interest in return.
The following is a summary of significant accounting policies:
(a) Valuation of Securities and Repurchase Agreements:
(1) Portfolio securities listed or traded on a securities exchange and
over-the-counter securities traded on the NASDAQ national market are
valued at the last sales price. If there are no transactions in the
security that day, securities are valued at the midpoint between the
closing bid and ask prices.
(2) All other portfolio securities for which over-the-counter market
quotations are readily available are valued at the midpoint between the
closing bid and ask prices. Repurchase agreements are valued at cost
which, combined with accrued interest, approximates market.
(3) When market quotations are not readily available, portfolio securities
are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the
Fund's Trustees.
(b) Accounting for Investments:
The Fund follows industry practice and records security transactions on
the day following the trade date (date the order to buy or sell is
executed). Realized gains and losses on security transactions are
determined using the specific identification method. Dividend income is
recognized on the ex-dividend date and interest income is recognized on an
accrual basis.
(c) Federal Income Taxes:
The Fund's policy is to comply with the requirements of the Internal
Revenue Code that are applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Accordingly, no
federal income tax provision is required. In addition, the Fund intends to
make any required distributions to avoid the application of a 4%
nondeductible excise tax.
(d) Distributions to Shareholders:
Dividends and distributions to shareholders are recorded on the
ex-dividend date.
<PAGE> 7
NOTE 2. INVESTMENT COUNSEL AGREEMENT
Southeastern Asset Management, Inc. ("Southeastern") serves as Investment
Counsel to the Fund and receives annual compensation from the Fund, computed
daily and paid monthly, of 1.0% per annum of average daily net assets.
The Investment Counsel has agreed to reduce its fees on a pro rata basis for
services rendered to the extent that the Fund's normal annual operating expenses
(excluding taxes, interest, brokerage fees, and extraordinary expenses) exceed
1.5% of average annual net assets. A reduction of $56,557 was required for the
six months ended June 30, 1996.
NOTE 3. FUND ADMINISTRATOR
Southeastern also serves as the Fund Administrator and in this capacity is
responsible for managing, performing or supervising the administrative and
business operations of the Fund, including, among other things, the preparation
of all registration statements, prospectuses, tax returns and proxy statements,
daily valuation of the Fund's portfolio and calculation of daily net asset value
per share. The Fund pays a fee as compensation for these services, accrued daily
and paid monthly, of 0.10% per annum of average daily net assets.
Reimbursable administration expenses paid by the Fund to Southeastern consist of
a portion of both the computer support charges for computer programs used in
processing transactions for the Fund and its shareholders and of the salary of
the Fund's Treasurer calculated in accordance with Trustee review and approval.
NOTE 4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
---------- -----------
<S> <C> <C>
Shares sold..................................... 2,389,516 $26,110,559
Shares redeemed................................. (429) (5,000)
---------- -----------
2,389,087 $26,105,559
========== ===========
</TABLE>
NOTE 5. INVESTMENT TRANSACTIONS
Purchases and sales of securities for the period (excluding short term
obligations) aggregated $23,191,979 and $1,599,362, respectively. Total
brokerage commissions paid by the Fund during the period were $86,348.
NOTE 6. INVESTMENTS IN SHORT TERM OBLIGATIONS
As excess funds are available, the Fund makes certain short term investments in
cash equivalents, including repurchase agreements. The Fund's custodian bank
sells U.S. government securities to the Fund under an agreement to repurchase
these securities from the Fund at a stated repurchase price including interest
for the term of the agreement, which is usually overnight or over a week-end.
The Fund, through its custodian, receives delivery of the underlying U.S.
government securities, the market value of which is required to be at
<PAGE> 8
least equal to the repurchase price. A repurchase agreement of $4,694,000 is
included in the statement of assets and liabilities at June 30, 1996.
NOTE 7. UNREALIZED APPRECIATION
Net unrealized appreciation consists of the following:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 1,308,730
Unrealized depreciation..................................... (58,630)
-----------
$ 1,250,100
===========
</TABLE>
NOTE 8. RELATED PARTY SHAREHOLDERS
At June 30, 1996, Mr. O. Mason Hawkins, Chairman of the Board and Chief
Executive Officer of Southeastern and of the Fund, owned 954,122 shares of the
Fund, constituting 39.9% of the outstanding shares; Mr. W. Reid Sanders, a
director and Executive Vice President of Southeastern and a member of the Board
of Trustees and President of the Fund, owned 188,778 shares of the Fund,
constituting 7.9% of the outstanding shares. Officers and employees of
Southeastern and their families, Fund trustees and the Southeastern retirement
plan and other affiliates owned an additional 216,488 shares, constituting 9.1%
of the outstanding shares.
<PAGE> 9
- ---------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------
The Fund was initially capitalized January 2, 1996. The following condensed
financial information, including total returns, has not been audited by Coopers
& Lybrand L.L.P., independent certified public accountants. The presentation is
for a share outstanding throughout each period.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1996
(UNAUDITED)
-------------
<S> <C>
Net Asset Value, Beginning of Period............................................ $ 10.00
Income from Investment Operations:
Net Investment Income......................................................... .10
Net Gains or Losses on Securities (both realized and unrealized).............. 1.59
-------------
Total From Investment Operations.............................................. 1.69
-------------
Net Asset Value, End of Period.................................................. $ 11.69
=============
Total Return.................................................................... 16.90%(1)
Ratios/Supplemental Data:
Net Assets, End of Period (000's)............................................. $27,922
Ratio of Expenses to Average Net Assets....................................... 1.50%*(2)
Ratio of Net Income to Average Net Assets..................................... 1.76%*
Portfolio Turnover Rate....................................................... 15.21%
</TABLE>
- ---------------
* Annualized
(1) Aggregate; not annualized.
(2) Before expense limitation fee waiver, this ratio was 2.36%.
<PAGE> 10
FIVE LARGEST HOLDINGS
(REPRESENTS 35.5% OF NET ASSETS AT 6/30/96)
FOREST CITY ENTERPRISES, INC. (FCE) 8.1%
A vertically integrated real estate company which develops, constructs, owns and
manages commercial and residential real estate throughout the U.S.
TRIZEC CORPORATION LTD. (TZC) 8.0%
A Canadian based commercial real estate company that owns, manages and develops
primarily retail (regional and super regional malls) and office space in the
U.S. and Canada.
COUSINS PROPERTIES INCORPORATED (CUZ) 7.3%
A self-advised, equity real estate investment trust concentrating in commercial
buildings primarily in Atlanta and the Southeast. The company also has valuable
non-income producing real estate holdings.
BAY VIEW CAPITAL CORP. (BVFS) 7.3%
The holding company for Bay View Federal Bank which uses deposits and other
funds to originate and purchase real estate loans and consumer loans, and serves
the nine counties contiguous with San Francisco Bay through 27 branch offices
and one loan production office.
RAYONIER INC. (RYN) 4.8%
A producer of wood products and specialty pulps which also owns or controls over
1.5 million acres of timberland in the U.S. and New Zealand.
<PAGE> 11
PORTFOLIO CHANGES
(UNAUDITED)
JANUARY 2, 1996 THROUGH JUNE 30, 1996
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
- ---------------------------------------- -----------------------------------------
<S> <C>
All portfolio holdings are new in 1996 Hilton Hotels Corp.
The Newhall Land and Farming Company
</TABLE>
PUBLISHED DAILY PRICE QUOTATIONS
The daily net asset values per share of each series of Longleaf Partners Funds
Trust are reported in the Mutual Fund Quotations tables of major newspapers in
alphabetical sequence under the bold heading LONGLEAF PARTNERS as follows:
"Partners" -- Longleaf Partners Fund
"Realty" -- Longleaf Partners Realty Fund
"Sm-Cap" -- Longleaf Partners Small-Cap Fund
REAL ESTATE INDUSTRY DEFINITION
The following definition appears in the Fund's Prospectus:
DEFINITION OF COMPANIES IN THE REAL ESTATE INDUSTRY. A company is considered to
be in the real estate industry (residential, commercial or industrial) or a
related industry if it satisfies one of the following tests:
1. Revenues and Net Profits. At least 50% of the company's gross revenues
or net profits is derived from construction, ownership, management,
operation, financing, sales, or development of real estate, or from the
extraction of timber or minerals from real estate owned or leased by the
company either as a lessor or as a lessee under a lease granting the
designated development or extraction rights, or from businesses which have
a clear relationship to the ownership, management, use, operation, or
development of real estate or appurtenances to real estate.
2. Valuation of Assets. At least 50% of the company's appraised value, as
determined by the Investment Counsel using its established appraisal
procedures for determining intrinsic value, is attributable to the current
appraised value of real estate owned or leased by the company either as
lessor or as lessee, to the current appraised value of timber or minerals
on such real estate, or to the current appraised value of the stream of
fees or revenues to be derived from the management or operation of real
estate or to the rights to extract timber or minerals from real estate.
Under the above definitions, at least 65% of the Fund's assets will be invested
in companies such as real estate investment trusts; manufacturers and
distributors of construction materials, equipment and building supplies;
financial institutions which make or service mortgages on real estate; hotel and
hotel management companies; retail chains; railroads; and lumber, paper, forest,
product, timber, mining and oil companies as well as other similar types of
companies which have a clear relationship to real estate or the real estate
industry. A company which is engaged in one or more businesses outside the real
estate industry will be considered to be in the real estate industry for
purposes of evaluating compliance with the Fund's investment objective if it
satisfies one of the above tests.
<PAGE> 12
- ---------------------------------------------
TRUSTEES
O. MASON HAWKINS, CFA --
Chairman, Southeastern Asset
Management, Inc.
Memphis, Tennessee
CHADWICK H. CARPENTER, JR. --
Senior Executive Officer, Progress
Software Corporation
Bedford, Massachusetts
JOHN R. McCARROLL, JR. --
Chairman, McCarroll Newman LLC
Memphis, Tennessee
STEVEN N. MELNYK --
Chairman of the Executive
Committee and President,
Riverside Golf Group, Inc.
Jacksonville, Florida
C. BARHAM RAY -- Chairman of the
Board and Secretary, SSM Corp.
Memphis, Tennessee
W. REID SANDERS -- Executive
Vice President, Southeastern
Asset Management, Inc.
Memphis, Tennessee
- ---------------------------------------------
This report is submitted for the general informa-
tion of shareholders of the Fund. For more detailed
information about the Fund, its management, fees,
expenses and other pertinent information, please
see the prospectus.
This report is not authorized for distribution to
prospective investors in the Fund unless preceded
or accompanied by an effective prospectus.
LONGLEAF
[LOGO] PARTNERS
FUNDS
MANAGED BY:
SOUTHEASTERN ASSET
MANAGEMENT, INC.
6075 POPLAR AVE.
SUITE 900
MEMPHIS, TN 38119
(901) 761-2474
(800) 488-4191
------------------------------------------------------
------------------------------------------------------
[LOGO]
SEMI-ANNUAL
REPORT
June 30, 1996
LONGLEAF PARTNERS
REALTY FUND
----------------------------------------------------
----------------------------------------------------
MANAGED BY:
SOUTHEASTERN ASSET
MANAGEMENT, INC.
