3.	*Segments*

Net operating income (segment revenues minus segment expenses) is the measure used by the Company’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. The Company 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 the Company’s real estate and construction businesses.

Net operating income of the Company’s reportable segments for the three and six months ended June 30, 2015 and 2014 was as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
	(Unaudited)
Office real estate
Rental revenues	$	8,052	$	6,519	$	15,755	$	13,068
Rental expenses		1,704		1,427		3,458		3,014
Real estate taxes		803		544		1,494		1,088

Segment net operating income		5,545		4,548		10,803		8,966

Retail real estate
Rental revenues		7,567		5,703		14,192		11,473
Rental expenses		1,346		1,187		2,745		2,509
Real estate taxes		704		503		1,270		1,006

Segment net operating income		5,517		4,013		10,177		7,958

Multifamily residential real estate
Rental revenues		4,289		3,097		8,151		5,971
Rental expenses		1,581		1,226		3,188		2,293
Real estate taxes		452		361		852		657

Segment net operating income		2,256		1,510		4,111		3,021

General contracting and real estate services
Segment revenues		47,066		20,495		76,137		39,729
Segment expenses		45,283		19,354		73,425		37,339

Segment net operating income		1,783		1,141		2,712		2,390

Net operating income	$	15,101	$	11,212	$	27,803	$	22,335

General contracting and real estate services revenues for the three and six months ended June 30, 2015 exclude revenue related to intercompany construction contracts of $8.0 million and $16.5 million, respectively. General contracting and real estate services expenses for the three and six months ended June 30, 2015 exclude expenses related to intercompany construction contracts of $8.0 million and $16.4 million, respectively. General contracting and real estate services expenses for the three months ended June 30, 2015 include noncash stock compensation expense of less than $0.1 million. General contracting and real estate services expenses for the six months ended June 30, 2015 include noncash stock compensation expense of $0.1 million.

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 expense of $0.1 million and $0.2 million, respectively.

The following table reconciles net operating income to net income for the three and six months ended June 30, 2015 and 2014 (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(Unaudited)
Net operating income	$	15,101		$	11,212		$	27,803		$	22,335
Depreciation and amortization		(5,766	)		(4,057	)		(10,674	)		(8,026	)
General and administrative expenses		(2,096	)		(1,981	)		(4,424	)		(4,027	)
Acquisition, development and other pursuit costs		(591	)		—			(762	)		—
Impairment charges		(23	)		—			(23	)		—
Interest expense		(3,358	)		(2,678	)		(6,404	)		(5,243	)
Loss on extinguishment of debt		(180	)		—			(407	)		—
Gain on real estate dispositions		7,210			—			13,407			—
Other income (loss)		(16	)		(194	)		(148	)		(82	)
Income tax benefit (provision)		4			(29	)		35			(178	)

Net income	$	10,285		$	2,273		$	18,403		$	4,779

General and administrative expenses for the three and six months ended June 30, 2015 include noncash stock compensation expense of $0.2 million and $0.4 million, respectively. General and administrative expenses for the three and six months ended June 30, 2014 include noncash stock compensation expense of $0.1 million and $0.3 million, respectively.