3.	*Segments*

Segment information is prepared on the same basis that Armada Hoffler’s management reviews information for operational decision making purposes. Management evaluates the performance of each of Armada Hoffler’s properties individually and aggregates such properties into segments based on their economic characteristics and classes of tenants. Armada Hoffler operates in four business segments (i) office real estate, (ii) retail real estate, (iii) multifamily residential real estate and (iv) general contracting and real estate services. Armada Hoffler’s office properties provide office space for various types of businesses and professions. Armada Hoffler’s retail properties are a diverse mix of (i) retail shopping centers typically anchored by large, nationally recognized tenants, (ii) retail centers located in the Virginia Beach Town Center and (iii) single-tenant properties. Armada Hoffler’s multifamily residential properties provide rental housing in Virginia Beach, VA and Blacksburg, VA. Armada Hoffler’s general contracting and real estate services business develops and builds properties for its own account and also provides construction and development services to related parties and third-party clients.

Net operating income (segment revenues minus segment expenses) is the measure used by Armada Hoffler’s chief operating decision-maker to assess segment performance. Net operating income is not a measure of operating income or cash flows from operating activities as measured by GAAP and is not indicative of cash available to fund cash needs. As a result, net operating income should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate net operating income in the same manner. Armada Hoffler considers net operating income to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of Armada Hoffler’s real estate and construction businesses.

Net operating income of Armada Hoffler’s reportable segments for the three and six months ended June 30, 2013 and 2012 was as follows (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(Unaudited)
Office real estate
Rental revenues	$	6,420		$	6,566		$	12,906		$	12,959
Property expenses		(1,940	)		(1,804	)		(3,886	)		(3,650	)

Segment net operating income		4,480			4,762			9,020			9,309

Retail real estate
Rental revenues		5,383			5,187			10,388			10,287
Property expenses		(1,629	)		(1,477	)		(3,309	)		(3,006	)

Segment net operating income		3,754			3,710			7,079			7,281
Multifamily residential real estate
Rental revenues		2,428			1,856			4,335			3,750
Property expenses		(1,078	)		(839	)		(1,893	)		(1,507	)

Segment net operating income		1,350			1,017			2,442			2,243

General contracting and real estate services
Segment revenues		23,291			12,383			41,247			27,024
Segment expenses		(22,503	)		(11,501	)		(39,961	)		(25,493	)

Segment net operating income		788			882			1,286			1,531

Other		—			(33	)		—			(37	)

Net operating income	$	10,372		$	10,338		$	19,827		$	20,327

General contracting and real estate services revenues for the three and six months ended June 30, 2013 exclude revenue related to intercompany construction contracts of approximately $3.7 million and $5.7 million, respectively. General contracting and real estate services expenses for the three and six months ended June 30, 2013 exclude expenses related to intercompany construction contracts of approximately $3.6 million and $5.6 million, respectively.

General contracting and real estate services revenues for the three and six months ended June 30, 2012 exclude revenue related to intercompany construction contracts of approximately $0.4 million and $0.8 million, respectively. General contracting and real estate services expenses for the three and six months ended June 30, 2012 exclude expenses related to intercompany construction contracts of approximately $0.4 million and $0.8 million, respectively.

The following table reconciles net operating income to net income for the three and six months ended June 30, 2013 and 2012 (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(Unaudited)
Net operating income	$	10,372		$	10,338		$	19,827		$	20,327
Depreciation and amortization		(4,020	)		(3,232	)		(7,179	)		(6,579	)
General and administrative expenses		(2,857	)		(954	)		(3,574	)		(1,788	)
Impairment charges		(533	)		—			(533	)		—
Interest expense		(3,289	)		(4,217	)		(7,204	)		(8,344	)
Loss on extinguishment of debt		(1,125	)		—			(1,125	)		—
Gain on acquisitions		9,460			—			9,460			—
Other income		185			164			452			387
Results from discontinued operations		—			11			—			(10	)
Income tax benefit		211			—			211			—

Net income	$	8,404		$	2,110		$	10,335		$	3,993

General and administrative expenses represent costs not directly associated with the operation and management of Armada Hoffler’s real estate properties. General and administrative expenses include office personnel salaries and benefits, bank fees, accounting fees and other office expenses. For the three and six months ended June 30, 2013, general and administrative expenses include $0.8 million of non-cash stock compensation.

During the three and six months ended June 30, 2013, the Company recognized a $0.5 million impairment representing unamortized leasing assets related to two vacated retail tenants.

Rental revenues of Armada Hoffler’s reportable segments for the three and six months ended June 30, 2013 and 2012 comprised the following (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(Unaudited)
Minimum rents
Office	$	6,105	$	5,944	$	12,205	$	11,947
Retail		4,609		4,366		8,974		8,696
Multifamily		2,063		1,603		3,690		3,193
Percentage rents⁽¹⁾
Office		—		—		104		109
Retail		29		31		53		56
Multifamily		21		25		63		63
Other⁽²⁾
Office		315		622		597		903
Retail		745		790		1,361		1,535
Multifamily		344		228		582		494

Rental revenues	$	14,231	$	13,609	$	27,629	$	26,996

(1)	Percentage rents are based on tenants’ sales.

(2)	Other rental revenue includes cost reimbursements for real estate taxes, property insurance and common area maintenance as well as termination fees.

Property expenses of Armada Hoffler’s reportable segments for the three and six months ended June 30, 2013 and 2012 comprised the following (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(Unaudited)
Rental expenses
Office	$	1,400	$	1,261	$	2,805	$	2,563
Retail		1,143		1,029		2,363		2,105
Multifamily		856		653		1,460		1,135
Other		—		1		—		5

Total	$	3,399	$	2,944	$	6,628	$	5,808

Real estate taxes
Office	$	540	$	543	$	1,081	$	1,087
Retail		486		448		946		901
Multifamily		222		186		433		372
Other		—		32		—		32

Total	$	1,248	$	1,209	$	2,460	$	2,392

Property expenses	$	4,647	$	4,153	$	9,088	$	8,200

Rental expenses represent costs directly associated with the operation and management of Armada Hoffler’s real estate properties. Rental expenses include asset management fees, property management fees, repairs and maintenance, insurance and utilities.