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 each of the three years ended December 31, 2014 was as follows (in thousands):


	Years Ended December 31,
	2014		2013		2012
Office real estate
Rental revenues	$	27,827	$	25,794	$	25,815
Property expenses		8,710		7,892		7,668

Segment net operating income		19,117		17,902		18,147

Retail real estate
Rental revenues		23,956		21,755		21,164
Property expenses		7,108		6,779		6,629

Segment net operating income		16,848		14,976		14,535

Multifamily residential real estate
Rental revenues		12,963		9,971		7,457
Property expenses		6,592		4,478		3,176

Segment net operating income		6,371		5,493		4,281

General contracting and real estate services
Segment revenues		103,321		82,516		54,046
Segment expenses		98,754		78,813		50,103

Segment net operating income		4,567		3,703		3,943

Other		—		—		(74	)

Net operating income	$	46,903	$	42,074	$	40,832

General contracting and real estate services revenues for each of the three years ended December 31, 2014 exclude revenue related to intercompany construction contracts of $85.4 million, $35.7 million and $1.4 million, respectively. General contracting and real estate services expenses for each of the three years ended December 31, 2014 exclude expenses related to intercompany construction contracts of $84.6 million, $35.4 million and $1.3 million, respectively. General contracting and real estate services expenses for the year ended December 31, 2014 include noncash stock compensation of $0.2 million.

The following table reconciles net operating income to net income for each of the three years ended December 31, 2014 (in thousands):


	Years Ended December 31,
	2014			2013			2012
Net operating income	$	46,903		$	42,074		$	40,832
Depreciation and amortization		(17,569	)		(14,898	)		(12,909	)
General and administrative expenses		(7,711	)		(6,937	)		(3,232	)
Acquisition, development and other pursuit costs		(229	)		—			—
Impairment charges		(15	)		(580	)		—
Interest expense		(10,648	)		(12,303	)		(16,561	)
Loss on extinguishment of debt		—			(2,387	)		—
Gain on real estate dispositions and acquisitions		2,211			9,460			—
Other (expense) income		(113	)		297			777
Income tax provision		(70	)		(273	)		—
Results from discontinued operations		—			—			(10	)

Net income	$	12,759		$	14,453		$	8,897

General and administrative expenses represent costs not directly associated with the operation and management of Armada Hoffler’s real estate properties and general contracting and real estate services businesses. 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 years ended December 31, 2014 and 2013 include noncash stock compensation of $0.7 million and $1.2 million, respectively.

Impairment charges recognized during the years ended December 31, 2014 and 2013 represent unamortized leasing assets related to vacated tenants.

Rental revenues for each of the three years ended December 31, 2014 comprised the following (in thousands):


	Years Ended December 31,
	2014		2013		2012
Minimum rents
Office	$	26,394	$	24,415	$	24,101
Retail		20,198		18,473		17,753
Multifamily		11,076		8,364		6,259
Percentage rents
Office		69		104		109
Retail		216		121		121
Multifamily		100		105		103
Other
Office		1,364		1,275		1,605
Retail		3,542		3,161		3,290
Multifamily		1,787		1,502		1,095

Rental revenues	$	64,746	$	57,520	$	54,436

Minimum rents include $2.2 million, $1.1 million and $2.2 million of straight-line rental revenue for each of the three years ended December 31, 2014, respectively. Minimum rents also include $(0.7) million, $(0.8) million and $(0.8) million of leasing incentive amortization for each of the three years ended December 31, 2014, respectively. Percentage rents are based on tenants’ sales. Other rental revenue includes cost reimbursements for real estate taxes, property insurance and common area maintenance as well as termination fees.

Property expenses for each of the three years ended December 31, 2014 comprised the following (in thousands):


	Years Ended December 31,
	2014		2013		2012
Rental expenses
Office	$	6,395	$	5,721	$	5,499
Retail		5,011		4,808		4,791
Multifamily		5,261		3,496		2,383
Other		—		—		9

Total		16,667		14,025		12,682

Real estate taxes
Office		2,315		2,171		2,169
Retail		2,097		1,971		1,838
Multifamily		1,331		982		793
Other		—		—		65

Total		5,743		5,124		4,865

Property expenses	$	22,410	$	19,149	$	17,547

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.