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 and six months ended June 30, 2014 and 2013 was as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(Unaudited)
Office real estate
Rental revenues	$	6,519	$	6,420	$	13,068	$	12,906
Property expenses		1,971		1,940		4,102		3,886

Segment net operating income		4,548		4,480		8,966		9,020

Retail real estate
Rental revenues		5,703		5,383		11,473		10,388
Property expenses		1,690		1,629		3,515		3,309

Segment net operating income		4,013		3,754		7,958		7,079

Multifamily residential real estate
Rental revenues		3,097		2,428		5,971		4,335
Property expenses		1,587		1,078		2,950		1,893

Segment net operating income		1,510		1,350		3,021		2,442

General contracting and real estate services
Segment revenues		20,495		23,291		39,729		41,247
Segment expenses		19,354		22,503		37,339		39,961

Segment net operating income		1,141		788		2,390		1,286

Net operating income	$	11,212	$	10,372	$	22,335	$	19,827

General contracting and real estate services revenues for the three and six months ended June 30, 2014 exclude revenue from intercompany construction contracts of $25.9 million and $44.6 million, respectively. General contracting and real estate services expenses for the three and six months ended June 30, 2014 exclude expenses for intercompany construction contracts of $25.5 million and $44.0 million, respectively. General contracting and real estate services expenses for the three and six months ended June 30, 2014 include noncash stock compensation of $0.1 million and $0.2 million, respectively.

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

The following table reconciles net operating income to net income for the three and six months ended June 30, 2014 and 2013 (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(Unaudited)
Net operating income	$	11,212		$	10,372		$	22,335		$	19,827
Depreciation and amortization		(4,057	)		(4,020	)		(8,026	)		(7,179	)
General and administrative expenses		(1,981	)		(2,857	)		(4,027	)		(3,574	)
Impairment charges		—			(533	)		—			(533	)
Interest expense		(2,678	)		(3,289	)		(5,243	)		(7,204	)
Loss on extinguishment of debt		—			(1,125	)		—			(1,125	)
Gain on acquisitions		—			9,460			—			9,460
Other (loss) income		(194	)		185			(82	)		452
Income tax (provision) benefit		(29	)		211			(178	)		211

Net income	$	2,273		$	8,404		$	4,779		$	10,335

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 and six months ended June 30, 2014 include noncash stock compensation of $0.1 million and 0.3 million, respectively. General and administrative expenses for the three and six months ended June 30, 2013 each include noncash stock compensation of $0.8 million.

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

During the three and six months ended June 30, 2013, the Company used proceeds from the IPO and the credit facility to repay $150.0 million of debt. The Company recognized a $1.1 million loss on extinguishment of debt representing $0.6 million of fees and $0.5 million of unamortized debt issuance costs.

Substantially concurrent with the completion of the IPO on May 13, 2013 and in connection with the Formation Transactions, the Operating Partnership acquired 100% of the interests in Bermuda Crossroads and Smith’s Landing. The acquisitions of controlling interests in Bermuda Crossroads and Smith’s Landing were accounted for as purchases at fair value under the acquisition method of accounting. Prior to the acquisition date, the Predecessor accounted for its noncontrolling interests in Bermuda Crossroads and Smith’s Landing as equity method investments. The Company recognized a $9.5 million gain on acquisitions as a result of remeasuring the Predecessor’s prior equity interests in Bermuda Crossroads and Smith’s Landing on the acquisition date.

Rental revenues of Armada Hoffler’s reportable segments for the three and six months ended June 30, 2014 and 2013 comprised the following (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(Unaudited)
Minimum rents
Office	$	6,220	$	6,105	$	12,372	$	12,205
Retail		4,819		4,609		9,593		8,974
Multifamily		2,643		2,063		5,093		3,690
Percentage rents⁽¹⁾
Office		—		—		45		104
Retail		46		29		137		53
Multifamily		24		21		59		63
Other⁽²⁾
Office		299		315		651		597
Retail		838		745		1,743		1,361
Multifamily		430		344		819		582

Rental revenues	$	15,319	$	14,231	$	30,512	$	27,629

(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, 2014 and 2013 comprised the following (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(Unaudited)
Rental expenses
Office	$	1,427	$	1,400	$	3,014	$	2,805
Retail		1,187		1,143		2,509		2,363
Multifamily		1,226		856		2,293		1,460

Total	$	3,840	$	3,399	$	7,816	$	6,628

Real estate taxes
Office	$	544	$	540	$	1,088	$	1,081
Retail		503		486		1,006		946
Multifamily		361		222		657		433

Total	$	1,408	$	1,248	$	2,751	$	2,460

Property expenses	$	5,248	$	4,647	$	10,567	$	9,088

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.