<PAGE> 1
LONGLEAF PARTNERS REALTY FUND
January 13, 1997
TO OUR SHAREHOLDERS:
We are extremely pleased to report that Longleaf Partners Realty Fund increased
its net asset value 40.7% for the year ended December 31, 1996. By comparison,
the Wilshire Real Estate Securities Index and the NAREIT Index rose 37.0% and
35.3%, respectively. The Fund's total returns and those of its primary
benchmarks are summarized in the table below.
<TABLE>
<CAPTION>
WILSHIRE
LONGLEAF PARTNERS REAL ESTATE NAREIT
REALTY FUND* SECURITIES INDEX* INDEX*
----------------- ----------------- ------
<S> <C> <C> <C>
YEAR ENDED 12/31/96 40.69% 37.02% 35.27%
FOURTH QUARTER ENDED 12/31/96 10.87% 18.39% 18.85%
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>
The Realty Fund invests with a minimum time horizon of three years. You should
not be surprised if our short-term results deviate substantially from the Fund's
benchmarks and/or broader market indices such as the S&P 500. However, over
longer time periods we will be disappointed if the Fund does not add value over
its benchmarks. During 1996 the Realty Fund's performance was consistently in
the top 10% of all real estate funds and at year-end was also among the top 7%
of all mutual funds tracked by Lipper Analytical Services, Inc.**
At the risk of being redundant, and because so many of our partners in Longleaf
Partners Realty Fund joined us in the last three months, we are restating our
core philosophies. 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 21 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.
In 1996 this approach led us away from companies structured as REITs (Real
Estate Investment Trusts) and to real estate related "C-Corp.'s" where we found
more attractively priced intrinsic value. As an example, early in 1996 the Fund
made an investment in Trizec which recently merged with Horsham Corp. to become
TrizecHahn. The combined firm has an equity market capitalization of over $3
billion and substantial financial resources to grow its core
business -- ownership of super regional malls and office buildings. Trizec-Hahn,
organized as a Canadian corporation, can and does retain all of its substantial
cash flow to buy, build, renovate, and add value to its real estate portfolio.
Consequently, the company is not dependent upon external equity capital to grow.
This model is superior to that of the majority of REITs which pay out most or
all of their available free cash flow in the form of predominantly taxable
dividends and retain no capital for growth.
It is important for every shareholder to understand the commitment that your
managers have to the Realty Fund's long-term success and our level of confidence
in the Fund as a vehicle for compounding our own assets. We continue to increase
our investment in Longleaf Partners Realty Fund, and invite you to do the same.
When considering the Fund you should know:
- The employees of Southeastern, advisor to the Fund, are required to use
Longleaf Partners Funds exclusively for equity investing (unless an
exception is given by our Compliance Committee for an overriding
circumstance).
<PAGE> 2
- Longleaf Partners Funds' Trustees must direct their total board
compensation into the three funds.
- With $21 million of our own capital invested in the Realty Fund, the
employees and affiliates of Southeastern are the Fund's largest
shareholder by a substantial margin.
- The Fund continues to operate more efficiently as it increases in size.
The overall expense ratio was capped at 1.50% in 1996 and is expected to
be lower in 1997.
- The Realty Fund's turnover in 1996 was 4.2%. We are very mindful of how
long holding periods and tax deferral benefit the compounding process and
our ultimate after tax return.
In closing we would like to welcome Daniel W. Connell, Jr. as a new Trustee.
After spending 25 years as a leading commercial banker with First Union in
Florida, Dan resigned in 1994 to help Jacksonville and Wayne Weaver secure an
NFL franchise. He currently serves as Senior Vice President of Marketing for the
Jaguars and Chairman of the Jacksonville Chamber of Commerce. We hope you will
meet Dan and join the rest of us at our annual meeting scheduled for Tuesday,
May 13 at 5:30 p.m. at the Memphis Botanic Gardens. We wish you and your family
a happy and prosperous new year.
Sincerely,
<TABLE>
<S> <C> <C>
/s/ C.T. Fitzpatrick /s/ O. Mason Hawkins /s/ G. Staley Cates
- - ---------------------------- ----------------------------- ---------------------------
C.T. Fitzpatrick, CFA O. Mason Hawkins, CFA G. Staley Cates, CFA
Co-Portfolio Manager Co-Portfolio Manager Co-Portfolio Manager
</TABLE>
- - --------------------------------------------------------------------------------
* The Fund's inception date was January 2, 1996. 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.
** For the year ended December 31, 1996, the Fund ranked #4 out of 46 real
estate funds and #33 out of all 4,590 mutual funds covered by Lipper
Analytical Services, Inc.
- - --------------------------------------------------------------------------------
Comparison of Change in Value of $10,000 Investment
in Longleaf Partners Realty Fund, the Wilshire Real Estate
Securities Index, and the NAREIT Index
CHART
The chart is a line graph with a beginning investment of $10,000 at 1/96, the
Fund's inception date, and continuing monthly to an ending value at 12/96 of
$14,069, compared with an ending value of $13,702 for the Wilshire Real Estate
Securities Index and an ending value of $13,527 for the NAREIT Index. The
chart includes an insert showing the Fund's average annual return for 1 year
(40.7%), compared with the returns for the same period of the Wilshire Real
Estate Securities Index and the NAREIT Index.
<PAGE> 3
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
FOR THE YEAR ENDED DECEMBER 31, 1996
Longleaf Partners Realty Fund (LLRE) produced a 40.7% total return in its first
year. We found a number of attractively priced investment opportunities to
employ the cash flows into the Fund.
Two companies were sold during the year, contributing to the Fund's performance.
Hilton Hotels provided 2.5% of LLRE's gain. Hilton is a company which
Southeastern has followed for many years and has previously owned. In January
the company was selling at approximately 60% of our appraisal, largely due to
the cancellation of plans to separate the gaming and lodging businesses into
separate companies. Wall Street's view of Hilton dramatically changed when the
company announced that Steve Bollenbach, then CFO of Disney and previously with
Trump, Marriott and Holiday Inns, was becoming CEO of Hilton. The company
reached our appraisal of full value quickly and was sold.
Of the thirty other companies that the Fund bought during the year, four
contributed substantially to the year's gains. Our position in Trizec benefitted
greatly when Horsham announced it was buying the remaining half of Trizec that
it did not already own. The new company, TrizecHahn became one of the world's
largest and most strongly capitalized real estate companies which was applauded
by Wall Street and added $4 million to Realty's performance. Forest City
Enterprises, with commercial and residential properties across the U.S.,
contributed over $2.4 million to LLRE's return with the combined Class A and B
holdings. The company's efforts to build long-term shareholder value resulted in
higher FFO (funds from operations), a measure which greatly interests Wall
Street. Arden Realty, a REIT with office buildings in Southern California,
provided over $2 million in unrealized gains. In our view, the initial offering
price was substantially lower than the replacement value of Arden's properties.
Since the offering, the market has also begun to recognize the value of the
company. Cousins Properties, an office REIT primarily in the Southeast, moved
its asset base to more income producing properties yielding higher FFO. Wall
Street approved and as a result, the company contributed 10.3% of LLRE's
performance.
The table on the following page provides a more detailed accounting of
contributions to performance in 1996.
<PAGE> 4
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The following table delineates the specific dollar contributions of individual
holdings to the 40.69% total return for 1996.
<TABLE>
<CAPTION>
PERCENTAGE
CONTRIBUTION OF TOTAL
IN 1996 CONTRIBUTION
------------ ------------
<S> <C> <C>
REALIZED GAINS:
Hilton Hotels Corp........................................ $ 436,541 2.5%
All others, net........................................... 53,991 0.3
----------- -----
490,532 2.8
----------- -----
INCREASE IN UNREALIZED APPRECIATION:
TrizecHahn Corporation.................................... 3,979,392 23.2
Arden Realty, Inc......................................... 2,124,750 12.3
Cousins Properties Incorporated........................... 1,780,077 10.3
Forest City Enterprises, Inc. - Class A................... 1,514,626 8.8
Catellus Development Corporation.......................... 1,076,285 6.3
Bay View Capital Corporation.............................. 972,709 5.7
Forest City Enterprises, Inc. - Class B................... 927,354 5.4
Red Roof Inns, Inc........................................ 712,338 4.2
Zurn Industries, Inc...................................... 629,201 3.7
First Fed Financial Corp.................................. 487,210 2.8
Wolohan Lumber Co......................................... 477,973 2.8
Essex Property Trust...................................... 406,491 2.4
Bradley Real Estate, Inc.................................. 373,862 2.2
The Pioneer Group, Inc.................................... (533,140) (3.1)
All others, net........................................... 1,351,612 7.8
----------- -----
16,280,740 94.8
----------- -----
Net realized and unrealized gain on investments............. 16,771,272 97.6
Net investment income....................................... 405,735 2.4
----------- -----
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $17,177,007 100.0%
=========== =====
</TABLE>
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
LONGLEAF PARTNERS REALTY FUND
We have audited the accompanying statement of assets and liabilities of Longleaf
Partners Realty Fund (a series of Longleaf Partners Funds Trust), including the
schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations, the statement of changes in net assets, and the
financial highlights for the year ended December 31, 1996. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures include confirmation of securities owned as of December 31, 1996 by
correspondence with the custodian and brokers. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Longleaf Partners Realty Fund as of December 31, 1996 and the results of its
operations, changes in its net assets, and the financial highlights for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 24, 1997
<PAGE> 6
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- COMMON STOCK (84.9%) ------------
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES (0.5%)
14,500 * White River Corporation.................................. $ 790,250
-----------
FURNITURE (1.2%)
236,600 * Rhodes, Inc.............................................. 1,833,650
-----------
INSURANCE AND BROKERAGE (3.7%)
130,000 Alexander & Alexander Services Inc....................... 2,258,750
264,400 Hilb, Rogal and Hamilton Company......................... 3,503,300
-----------
5,762,050
-----------
PUBLISHING (4.3%)
178,000 Knight-Ridder, Inc....................................... 6,808,500
-----------
REAL ESTATE INDUSTRY (75.2%)
19,200 Alexander & Baldwin, Inc................................. 480,000
365,000 Arden Realty, Inc........................................ 10,128,750
102,000 Bradley Real Estate, Inc................................. 1,836,000
34,000 Burnham Pacific Properties............................... 510,000
100,000 Bay View Capital Corp.................................... 4,237,500
359,200 * Castle & Cooke, Inc...................................... 5,702,300
1,390,400 * Catellus Development Corporation......................... 15,815,800
256,900 Cousins Properties Incorporated.......................... 7,225,313
44,000 Essex Property Trust..................................... 1,292,500
80,000 * First Fed Financial Corp................................. 1,760,000
87,900 Forest City Enterprises, Inc. - Class A.................. 5,317,950
40,800 Forest City Enterprises, Inc. - Class B.................. 2,468,400
672,300 * IHOP Corp................................................ 15,883,087
28,000 Louisiana-Pacific Corporation............................ 591,500
293,700 The Pioneer Group, Inc................................... 6,975,375
35,000 * Quaker City Bancorp, Inc................................. 665,000
261,000 Rayonier Inc............................................. 10,015,875
12,500 Reckson Associates Realty Corp........................... 528,125
295,000 * Red Roof Inns, Inc....................................... 4,572,500
282,400 Sizeler Property Investors, Inc.......................... 2,718,100
213,500 * Supertel Hospitality, Inc................................ 1,921,500
469,160 * TrizecHahn Corporation................................... 10,321,520
28,000 * USG Corporation.......................................... 948,500
190,200 Wolohan Lumber Co........................................ 2,377,500
113,400 Zurn Industries, Inc..................................... 2,962,575
-----------
117,255,670
-----------
TOTAL COMMON STOCKS (COST $116,169,380)................................... 132,450,120
-----------
</TABLE>
See Notes to Financial Statements.
<PAGE> 7
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
MARKET VALUE
------------
<S> <C> <C> <C> <C> <C>
SHORT TERM OBLIGATIONS (15.2%)
Certificates of Deposit in Thrift Institutions............................ $ 9,000
Repurchase Agreement with State Street Bank and Trust Company, dated
12-31-96 due 1-2-97 at 4.75%, collateralized by $716,504 U.S. Treasury
Bond due 2-15-20 (Repurchase proceeds-$700,185) (Cost $700,000).......... 700,000
U.S. Treasury Bill, due 1-2-97, yield at date of purchase 4.82%........... 16,997,757
U.S. Treasury Bill, due 1-9-97, yield at date of purchase 4.11%........... 2,997,300
U.S. Treasury Bill, due 1-16-97, yield at date of purchase 4.57%.......... 2,994,375
------------
23,698,432
------------
TOTAL INVESTMENTS (COST $139,867,812)*....................................... 100.1% 156,148,552
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................... (0.1) (139,328)
----- ------------
NET ASSETS................................................................... 100.0% $156,009,224
===== ============
NET ASSET VALUE PER SHARE (OFFERING AND REDEMPTION PRICE PER SHARE) BASED ON
11,165,607 SHARES OUTSTANDING AT DECEMBER 31, 1996................................ $ 13.97
============
</TABLE>
* Non-income producing security
* * Also represents aggregate cost for Federal income tax purposes
See Notes to Financial Statements.
<PAGE> 8
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments:
Securities, at market value (cost $116,169,380) (Note 1
and Note 7)............................................ $132,450,120
U.S. Treasury Bills....................................... 22,989,432
Repurchase agreement (Note 6)............................. 700,000
Deposits in thrift institutions........................... 9,000
------------
TOTAL INVESTMENTS 156,148,552
Cash........................................................ 5,382
Dividends and interest receivable........................... 183,179
Prepaid assets.............................................. 3,456
------------
TOTAL ASSETS 156,340,569
------------
LIABILITIES:
Payable for:
Securities purchased...................................... 92,500
Investment Counsel fee (Note 2)........................... 142,316
Administration fees (Note 3).............................. 11,829
Other accrued expenses...................................... 84,700
------------
TOTAL LIABILITIES 331,345
------------
NET ASSETS $156,009,224
============
Composition of net assets:
Paid-in capital (unlimited number of shares authorized,
11,165,607 shares outstanding)......................... $139,719,202
Undistributed net investment income....................... 5,919
Accumulated net realized gain............................. 3,363
Unrealized appreciation of investments (Note 7)........... 16,280,740
------------
NET ASSETS $156,009,224
============
NET ASSET VALUE (OFFERING AND REDEMPTION PRICE) PER SHARE
($156,009,224 DIVIDED BY 11,165,607 SHARES)............... $13.97
============
</TABLE>
See Notes to Financial Statements.
<PAGE> 9
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends................................................. $ 672,709
Interest.................................................. 390,751
-----------
1,063,460
-----------
EXPENSES:
Investment Counsel fee (Note 2)........................... 438,484
Registration and filing fees.............................. 78,446
Administration fee (Note 3)............................... 43,848
Reimbursable administration expenses (Note 3)............. 30,397
Printing.................................................. 24,885
Custodian fee............................................. 24,356
Professional fees......................................... 21,210
Trustees' fees............................................ 18,315
Transfer agent fee........................................ 7,871
Supplies and postage...................................... 7,523
Insurance expense......................................... 3,167
Miscellaneous............................................. 6,424
Less: Fee reduction (Note 2).............................. (47,201)
-----------
657,725
-----------
Net investment income............................. 405,735
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain from securities transactions, net:
Proceeds from sales.................................... 1,637,737
Cost of securities sold................................ 1,147,205
-----------
Net realized gain................................. 490,532
Increase in unrealized appreciation for the year, net..... 16,280,740
-----------
Net realized and unrealized gain on investments... 16,771,272
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $17,177,007
===========
</TABLE>
See Notes to Financial Statements.
<PAGE> 10
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
OPERATIONS:
Net investment income..................................... $ 405,735
Net realized gain on investments.......................... 490,532
Net unrealized appreciation for the period................ 16,280,740
------------
Net increase in net assets resulting from operations... 17,177,007
------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gain on investments ($0.04589 per
share)................................................. (487,169)
From net investment income ($0.03766 per share)........... (399,816)
From return of capital ($0.01502 per share)............... (159,496)
------------
Net decrease in net assets resulting from
distributions......................................... (1,046,481)
------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares.......................... 150,091,326
Net asset value of shares issued to shareholders for
reinvestment of shareholder distributions.............. 999,870
Cost of shares redeemed................................... (11,212,498)
------------
Net increase in net assets from fund share
transactions.......................................... 139,878,698
------------
Total increase in net assets........................... 156,009,224
NET ASSETS:
Beginning of year......................................... 0
------------
End of year (including undistributed net investment income
of $5,919)............................................. $156,009,224
============
</TABLE>
See Notes to Financial Statements.
<PAGE> 11
- - --------------------------------------------------------------------------------
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 funded and commenced its
public offering of shares 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> 12
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 $47,201 was required for the
year ended December 31, 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.................................... 11,949,427 $150,091,326
Reinvestment of shareholder distributions...... 71,778 999,870
Shares redeemed................................ (855,598) (11,212,498)
---------- ------------
11,165,607 $139,878,698
========== ============
</TABLE>
NOTE 5. INVESTMENT TRANSACTIONS
Purchases and sales of securities for the period (excluding short term
obligations) aggregated $117,476,081 and $1,637,737, respectively. Total
brokerage commissions paid by the Fund during the period were $427,047.
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 weekend. The
Fund, through its custodian, receives delivery of the underlying U.S. government
securities as collateral, the market value of which is required to be at least
equal to the repurchase price. If the custodian becomes bankrupt, the Fund might
be
<PAGE> 13
delayed, or may incur costs or possible losses of principal and income, in
selling the collateral. A repurchase agreement of $700,000 is included in the
statement of assets and liabilities at December 31, 1996.
NOTE 7. UNREALIZED APPRECIATION
Net unrealized appreciation consists of the following:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $17,288,185
Unrealized depreciation..................................... (1,007,445)
-----------
$16,280,740
===========
</TABLE>
NOTE 8. RELATED PARTY SHAREHOLDERS
At December 31, 1996, Mr. O. Mason Hawkins, Chairman of the Board and Chief
Executive Officer of Southeastern and of the Fund, owned 960,873 shares of the
Fund, constituting 8.6% 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 190,114 shares of the Fund,
constituting 1.7% 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 368,580 shares, constituting 3.3%
of the outstanding shares.
NOTE 9. OTHER PORTFOLIO INFORMATION
At December 31, 1996, the Fund held 5% or more of the outstanding voting stock
of the following company: 7.1% of IHOP Corp.
<PAGE> 14
FIVE LARGEST HOLDINGS
(REPRESENTS 39.8% OF NET ASSETS AT 12/31/96)
IHOP CORP. (IHOP) 10.2%
A franchisor that develops and leases strategically selected locations to
franchisees for IHOP family restaurants. Earnings from real estate leases are
IHOP's largest contributor to profits.
CATELLUS DEVELOPMENT CORPORATION (CDX) 10.1%
A diversified real estate company that owns, manages and develops industrial
warehouses, offices, apartments and residential communities. CDX has substantial
land holdings throughout the U.S.
TRIZECHAHN CORPORATION (TZH) 6.6%
One of the world's largest commercial real estate companies which owns, manages
and develops primarily retail (regional and super regional malls) and office
space in the U.S., Canada and Eastern Europe.
ARDEN REALTY, INC. (ARI) 6.5%
A real estate investment trust (REIT) which owns and operates over 4 million
square feet of office buildings in Southern California.
RAYONIER INC. (RYN) 6.4%
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.
PORTFOLIO CHANGES
JANUARY 2, 1996 THROUGH DECEMBER 31, 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
<PAGE> 15
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
FINANCIAL HIGHLIGHTS
The Fund was initially capitalized January 2, 1996. The following condensed
financial information, including total returns, has been audited by Coopers &
Lybrand L.L.P., independent certified public accountants. The audit report on
the 1996 financial statements issued by Coopers & Lybrand L.L.P. appears in this
report and should be read in conjunction with this condensed financial
information. The presentation is for a share outstanding throughout the year.
<TABLE>
<CAPTION>
<S> <C>
Net Asset Value, Beginning of Year.......................... $ 10.00
Income from Investment Operations:
Net Investment Income..................................... .16
Net Gains or Losses on Securities (both realized and
unrealized)............................................ 3.91
--------
Total From Investment Operations.......................... 4.07
--------
Less Distributions:
Dividends from net investment income...................... (.04)
Distributions from capital gains.......................... (.05)
Return of capital......................................... (.01)
--------
(.10)
--------
Net Asset Value, End of Year................................ $ 13.97
========
Total Return................................................ 40.69%(1)
Ratios/Supplemental Data:
Net Assets, End of Year (000's)........................... $156,009
Ratio of Expenses to Average Net Assets................... 1.50%(2)
Ratio of Net Income to Average Net Assets................. .92%(3)
Portfolio Turnover Rate................................... 4.28%
Average commission rate paid.............................. $ 0.0613
</TABLE>
- - ---------------
(1) Aggregate; not annualized.
(2) Before expense limitation fee waiver, this ratio was 1.60%.
(3) Before expense limitation fee waiver, this ratio was .82%.
<PAGE> 16
- - ---------------------------------------------
TRUSTEES
O. MASON HAWKINS, CFA --
Chairman, Southeastern Asset
Management, Inc.
Memphis, Tennessee
CHADWICK H. CARPENTER, JR. --
Senior Executive Officer, Progress
Software Corporation
Bedford, Massachusetts
DANIEL W. CONNELL, JR. --
Senior Vice President Marketing,
Jacksonville Jaguars, Ltd.
Jacksonville, Florida
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
PARTNERS
FUNDS
LOGO
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
ANNUAL
REPORT
December 31, 1996
LONGLEAF PARTNERS
REALTY FUND
----------------------------------------------------
----------------------------------------------------
MANAGED BY:
SOUTHEASTERN ASSET
MANAGEMENT, INC.
