<PAGE> 1
LONGLEAF PARTNERS REALTY FUND
October 1, 1996
TO OUR SHAREHOLDERS:
Longleaf Partners Realty Fund's net asset value increased 8.6% in the quarter
ended September 30, 1996 and is up 26.9% since the Fund began operations on
January 2. By comparison, the Wilshire Real Estate Securities Index rose 5.9% in
the third quarter and is up 15.7% year-to-date.
While our history as a public fund is short, your management is extremely
pleased with the early results. As shown in the table below, Longleaf Partners
Realty Fund has outperformed both its primary benchmark, the Wilshire Real
Estate Securities Index, and its secondary average, the NAREIT Index, in each
quarter since the Fund's inception as well as for the first nine months.
<TABLE>
<CAPTION>
WILSHIRE
LONGLEAF PARTNERS REAL ESTATE NAREIT
REALTY FUND* SECURITIES INDEX* INDEX*
----------------- ----------------- ------
<S> <C> <C> <C>
NINE MONTHS ENDED 9/30/96 26.90% 15.73% 13.81 %
THIRD QUARTER ENDED 9/30/96 8.55% 5.90% 6.54 %
SECOND QUARTER ENDED 6/30/96 7.84% 4.78% 4.45 %
FIRST QUARTER ENDED 3/31/96 8.40% 4.30% 2.27 %
</TABLE>
Additionally, Longleaf Partners Realty Fund was the #1 PERFORMING REAL ESTATE
MUTUAL FUND FOR THE FIRST QUARTER, THE SECOND QUARTER, THE FIRST SIX MONTHS, AND
THE FIRST NINE MONTHS OF 1996 according to Lipper Analytical Services, Inc.
which tracks 46 mutual funds with similar objectives.
Since our partners/shareholders have increased dramatically over the last three
months, we are reprinting the philosophy behind Longleaf Partners Realty Fund
for our new owners. 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.
In our third quarter reports two years ago to our other two Funds' owners we
outlined what our ongoing commitment would be to our fellow shareholders. We
think you also should know how we intend to behave as both your advisor and your
partner.
OUR COMMITMENT TO OUR INVESTMENT PARTNERS
- We will treat your investment in Longleaf Partners Realty Fund as if it
were our own.
- We will remain significant investors with you in Longleaf Partners Realty
Fund.
- We will invest for the long-term in an attempt to maximize after-tax
returns while always striving to minimize business, financial, purchasing
power, regulatory and market risks.
<PAGE> 2
- We will choose our common stock investments based on their discount from
our appraisal of their corporate intrinsic value, their financial
strength, their management, their competitive position, and our
assessment of their future earnings potential.
- We will meet regulatory diversification requirements without
overdiversifying our holdings.
- We will not impose loads, holding periods, exit fees or 12b-1 charges on
our investment partners.
- We will consider closing the Fund to new investors if our size begins to
restrict our ability to manage the portfolio.
- We will discourage short-term speculators and market timers from joining
us, the long-term investors.
- We will continue our efforts to improve shareholder services.
- We will communicate with our investment partners as candidly as possible.
In a continuing effort to further these commitments and to more properly align
your interests with those of Southeastern's management and your Fund's Trustees,
we have taken two additional steps to improve our corporate governance. First,
we have adopted a personal securities trading policy and Code of Ethics which
requires Southeastern personnel to use the Longleaf Partners Funds as the sole
vehicles for their equity investments. Exceptions must be approved by our
Compliance Committee. Secondly, we have approved a resolution which requires our
Trustees to invest their Board compensation into shares of our three Funds.
The principals of Southeastern Asset Management, Inc., advisor to Longleaf
Partners Realty Fund, continue as the Fund's largest investment group with an
$18 million stake. We plan to add to our investment position.
Finally, we want to thank John R. McCarroll, Jr. for his many contributions and
wise counsel to the Longleaf Partners Funds over the past nine years. John was
an original Board member and our longest serving outside trustee. On August 23,
1996 The Honorable Don Sundquist, Governor of the State of Tennessee, appointed
John to the position of Circuit Court Judge - Division I for the 30th Judicial
District of the State of Tennessee. While the Judicial Canons of Ethics
necessitate his resignation from our Board, John will remain an important
investment partner in the Longleaf Partners Funds.
We welcome all of our new shareholders. We look forward to a long and successful
investment partnership.
Sincerely,
<TABLE>
<S> <C> <C>
/s/ C.T. Fitzpatrick, CFA /s/ O. Mason Hawkins, CFA /s/ G. Staley Cates, CFA
C.T. Fitzpatrick, CFA O. Mason Hawkins, CFA G. Staley Cates, CFA
Co-Portfolio Manager Co-Portfolio Manager Co-Portfolio Manager
</TABLE>
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* 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 performance is no guarantee of future performance,
and the value of an investment when redeemed may be more or less than the
purchase price.
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<PAGE> 3
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LONGLEAF PARTNERS REALTY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT SEPTEMBER 30, 1996 (UNAUDITED)
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<TABLE>
<CAPTION>
SHARES COMMON STOCK (75.3%) MARKET VALUE
------- ------------
<S> <C> <C> <C> <C>
FINANCIAL SERVICES (1.3%)
14,500 * White River Corporation.................................... $ 899,000
------------
FURNITURE (2.6%)
236,600 * Rhodes, Inc................................................ 1,774,500
------------
INSURANCE AND BROKERAGE (3.1%)
130,000 Alexander & Alexander Services Inc......................... 2,161,250
------------
PUBLISHING (3.3%)
62,000 Knight-Ridder, Inc......................................... 2,294,000
------------
REAL ESTATE INDUSTRY (65.0%)
19,200 Alexander & Baldwin, Inc................................... 470,400
102,000 Bradley Real Estate, Inc................................... 1,657,500
34,000 Burnham Pacific Properties................................. 399,500
86,000 Bay View Capital Corp...................................... 3,063,750
185,900 * Castle & Cooke, Inc........................................ 3,067,350
106,700 Cousins Properties Incorporated............................ 2,347,400
44,000 Essex Property Trust....................................... 1,094,500
80,000 * First Fed Financial Corp................................... 1,580,000
73,500 Forest City Enterprises, Inc. - Class A.................... 3,601,500
40,800 Forest City Enterprises, Inc. - Class B.................... 1,999,200
33,000 The Horsham Corporation.................................... 536,250
28,000 Louisiana-Pacific Corporation.............................. 637,000
122,000 The Pioneer Group, Inc..................................... 3,202,500
35,000 * Quaker City Bancorp, Inc................................... 507,500
79,900 Rayonier Inc............................................... 3,176,025
12,500 Reckson Associates Realty Corp............................. 464,062
211,700 * Red Roof Inns, Inc......................................... 2,884,413
188,400 Sizeler Property Investors, Inc............................ 1,695,600
752,000 * Trizec Corporation Ltd..................................... 7,144,000
28,000 * USG Corporation............................................ 829,500
190,200 Wolohan Lumber Co.......................................... 2,020,875
113,400 Zurn Industries, Inc....................................... 2,537,325
------------
44,916,150
------------
TOTAL COMMON STOCKS (COST $47,112,172).................................. 52,044,900
------------
SHORT TERM OBLIGATIONS (25.8%)
Certificates of Deposit in Thrift Institutions.......................... 9,000
Passbook Savings Deposits in Thrift Institutions........................ 123,000
Repurchase Agreement with State Street Bank and Trust Company, dated
9-30-96 due 10-1-96 at 4.75%, collateralized by $18,061,862 U.S.
Treasury Bond due 2-15-23 (Repurchase proceeds-$17,707,336) (Cost
$17,705,000)........................................................... 17,705,000
------------
17,837,000
------------
TOTAL INVESTMENTS (COST $64,949,172)* *.................................... 101.1% 69,881,900
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................. (1.1) (790,251 )
----- ------------
NET ASSETS................................................................. 100.0% $69,091,649
===== =============
NET ASSET VALUE PER SHARE (OFFERING AND REDEMPTION PRICE PER SHARE) BASED ON
5,444,172 SHARES OUTSTANDING AT SEPTEMBER 30, 1996.............................. $12.69
</TABLE>
* Non-income producing security
* * Also represents aggregate cost for Federal income tax purposes
<PAGE> 4
FIVE LARGEST HOLDINGS
(REPRESENTS 32.0% OF NET ASSETS AT 9/30/96)
TRIZEC CORPORATION LTD. (TZC) 10.3%
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.
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.
THE PIONEER GROUP, INC. (PIOG) 4.6%
A gold mining company whose main assets are in Ghana. Pioneer Group owns
timberlands in Russia, and manages, distributes, and services mutual funds both
in the U.S. and overseas.
RAYONIER INC. (RYN) 4.6%
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.
BAY VIEW CAPITAL CORP. (BVFS) 4.4%
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.
<PAGE> 5
PORTFOLIO CHANGES
(UNAUDITED)
JANUARY 2, 1996 THROUGH SEPTEMBER 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> 6
- ---------------------------------------------
TRUSTEES
O. MASON HAWKINS, CFA --
Chairman, Southeastern Asset
Management, Inc.
Memphis, Tennessee
CHADWICK H. CARPENTER, JR. --
Senior Executive Officer, Progress
Software Corporation
Bedford, Massachusetts
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
Fund Information Requests
(800) 445-9469
Shareholder Account Inquiries
(800) 488-4191
(LOGO)
QUARTERLY
REPORT
September 30, 1996
LONGLEAF PARTNERS
REALTY FUND
----------------------------------------------------
----------------------------------------------------
MANAGED BY:
SOUTHEASTERN ASSET
MANAGEMENT, INC.
