3.	*Segments*

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 months ended March 31, 2014 and 2013 was as follows (in thousands):


	Three Months Ended March 31,
	2014		2013
	(Unaudited)
Office real estate
Rental revenues	$	6,549	$	6,486
Property expenses		2,131		1,946


Segment net operating income		4,418		4,540


Retail real estate
Rental revenues		5,770		5,005
Property expenses		1,825		1,680


Segment net operating income		3,945		3,325


Multifamily residential real estate
Rental revenues		2,874		1,907
Property expenses		1,363		815


Segment net operating income		1,511		1,092


General contracting and real estate services
Segment revenues		19,234		17,956
Segment expenses		17,985		17,458


Segment net operating income		1,249		498


Net operating income	$	11,123	$	9,455

General contracting and real estate services revenues for the three months ended March 31, 2014 and 2013 exclude revenue related to intercompany construction contracts of $18.7 million and $2.0 million, respectively. General contracting and real estate services expenses for the three months ended March 31, 2014 and 2013 exclude expenses related to intercompany construction contracts of $18.5 million and $2.0 million, respectively. General contracting and real estate services expenses for the three months ended March 31, 2014 includes noncash stock compensation of $0.1 million.

The following table reconciles net operating income to net income for the three months ended March 31, 2014 and 2013 (in thousands):


	Three Months Ended March 31,
	2014			2013
	(Unaudited)
Net operating income	$	11,123		$	9,455
Depreciation and amortization		(3,969	)		(3,159	)
General and administrative expenses		(2,046	)		(717	)
Interest expense		(2,565	)		(3,915	)
Other income		112			267
Income tax provision		(149	)		—


Net income	$	2,506		$	1,931

General and administrative expenses represent costs not directly associated with the operation and management of Armada Hoffler’s real estate properties and general contracting business. General and administrative expenses include office personnel salaries and benefits, bank fees, accounting fees, legal fees and other corporate office expenses. General and administrative expenses for the three months ended March 31, 2014 include noncash stock compensation of $0.2 million.

Rental revenues of Armada Hoffler’s reportable segments for the three months ended March 31, 2014 and 2013 comprised the following (in thousands):


	Three Months Ended March 31,
	2014		2013
	(Unaudited)
Minimum rents
Office	$	6,152	$	6,100
Retail		4,774		4,365
Multifamily		2,450		1,627
Percentage rents (1)
Office		45		104
Retail		91		24
Multifamily		35		42
Other (2)
Office		352		282
Retail		905		616
Multifamily		389		238


Rental revenues	$	15,193	$	13,398

(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 months ended March 31, 2014 and 2013 comprised the following (in thousands):


	Three Months Ended March 31,
	2014		2013
	(Unaudited)
Rental expenses
Office	$	1,587	$	1,405
Retail		1,322		1,220
Multifamily		1,067		604


Total		3,976		3,229


Real estate taxes
Office		544		541
Retail		503		460
Multifamily		296		211


Total		1,343		1,212


Property expenses	$	5,319	$	4,441

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.