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 nine months ended September 30, 2013 and 2012 was as follows (in thousands):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013		2012
	(Unaudited)
Office real estate
Rental revenues	$	6,364	$	6,194		$	19,270	$	19,153
Property expenses		2,081		2,271			5,967		5,921

Segment net operating income		4,283		3,923			13,303		13,232

Retail real estate
Rental revenues		5,683		5,297			16,071		15,584
Property expenses		1,745		1,618			5,054		4,624

Segment net operating income		3,938		3,679			11,017		10,960
Multifamily residential real estate
Rental revenues		2,852		1,827			7,187		5,577
Property expenses		1,331		946			3,224		2,453

Segment net operating income		1,521		881			3,963		3,124

General contracting and real estate services
Segment revenues		21,896		13,631			63,143		40,655
Segment expenses		20,907		12,707			60,868		38,200

Segment net operating income		989		924			2,275		2,455

Other		—		(2	)		—		(39	)

Net operating income	$	10,731	$	9,405		$	30,558	$	29,732

General contracting and real estate services revenues for the three and nine months ended September 30, 2013 exclude revenue related to intercompany construction contracts of approximately $13.3 million and $18.9 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2013 exclude expenses related to intercompany construction contracts of approximately $13.1 million and $18.7 million, respectively.

General contracting and real estate services revenues for the three and nine months ended September 30, 2012 exclude revenue related to intercompany construction contracts of approximately $0.2 million and $1.0 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2012 exclude expenses related to intercompany construction contracts of approximately $0.2 million and $1.0 million, respectively.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(Unaudited)
Net operating income	$	10,731		$	9,405		$	30,558		$	29,732
Depreciation and amortization		(3,933	)		(2,718	)		(11,112	)		(9,297	)
General and administrative expenses		(1,638	)		(904	)		(5,212	)		(2,692	)
Impairment charges		—			—			(533	)		—
Interest expense		(2,598	)		(4,174	)		(9,802	)		(12,518	)
Loss on extinguishment of debt		(1,127	)		—			(2,252	)		—
Gain on acquisitions		—			—			9,460			—
Other income (expense)		(109	)		146			343			533
Results from discontinued operations		—			—			—			(10	)
Income tax benefit (expense)		(74	)		—			137			—

Net income	$	1,252		$	1,755		$	11,587		$	5,748

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 nine months ended September 30, 2013, general and administrative expenses include non-cash stock compensation of $0.2 million and $1.0 million, respectively.

During the nine months ended September 30, 2013, the Company recognized $0.5 million of impairment charges representing unamortized leasing assets related to two vacated retail tenants.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(Unaudited)
Minimum rents
Office	$	6,059	$	5,972	$	18,264	$	17,919
Retail		4,759		4,376		13,733		13,072
Multifamily		2,370		1,621		6,060		4,814
Percentage rents⁽¹⁾
Office		—		—		104		109
Retail		35		40		88		96
Multifamily		21		30		84		93
Other⁽²⁾
Office		304		222		901		1,125
Retail		890		881		2,251		2,416
Multifamily		461		176		1,043		670

Rental revenues	$	14,899	$	13,318	$	42,528	$	40,314

(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 nine months ended September 30, 2013 and 2012 comprised the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(Unaudited)
Rental expenses
Office	$	1,536	$	1,740	$	4,341	$	4,303
Retail		1,230		1,134		3,593		3,239
Multifamily		1,074		761		2,534		1,896
Other		—		2		—		7

Total	$	3,840	$	3,637	$	10,468	$	9,445

Real estate taxes
Office	$	545	$	531	$	1,626	$	1,618
Retail		515		484		1,461		1,385
Multifamily		257		185		690		557
Other		—		—		—		32

Total	$	1,317	$	1,200	$	3,777	$	3,592

Property expenses	$	5,157	$	4,837	$	14,245	$	13,037

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.