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 nine months ended September 30, 2015 and 2014 was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(Unaudited)
Office real estate
Rental revenues	$	8,092	$	7,295	$	23,847	$	20,363
Rental expenses		1,758		1,742		5,216		4,756
Real estate taxes		734		609		2,228		1,697

Segment net operating income		5,600		4,944		16,403		13,910

Retail real estate
Rental revenues		8,523		6,086		22,715		17,559
Rental expenses		1,478		1,255		4,223		3,764
Real estate taxes		810		540		2,080		1,546

Segment net operating income		6,235		4,291		16,412		12,249

Multifamily residential real estate
Rental revenues		4,688		3,332		12,839		9,303
Rental expenses		1,629		1,417		4,817		3,710
Real estate taxes		512		331		1,364		988

Segment net operating income		2,547		1,584		6,658		4,605

General contracting and real estate services
Segment revenues		53,822		31,532		129,959		71,261
Segment expenses		51,716		30,468		125,141		67,807

Segment net operating income		2,106		1,064		4,818		3,454

Net operating income	$	16,488	$	11,883	$	44,291	$	34,218

General contracting and real estate services revenues for the three and nine months ended September 30, 2015 exclude revenue related to intercompany construction contracts of $11.4 million and $27.9 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2015 exclude expenses related to intercompany construction contracts of $11.3 million and $27.7 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2015 include noncash stock compensation expense of less than $0.1 million and $0.2 million, respectively.

General contracting and real estate services revenues for the three and nine months ended September 30, 2014 exclude revenue from intercompany construction contracts of $24.2 million and $68.8 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2014 exclude expenses for intercompany construction contracts of $24.1 million and $68.2 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2014 include noncash stock compensation expense of less than $0.1 million and $0.2 million, respectively.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(Unaudited)
Net operating income	$	16,488		$	11,883		$	44,291		$	34,218
Depreciation and amortization		(6,317	)		(4,567	)		(16,991	)		(12,593	)
General and administrative expenses		(1,873	)		(1,741	)		(6,297	)		(5,768	)
Acquisition, development and other pursuit costs		(288	)		(174	)		(1,050	)		(174	)
Impairment charges		—			(15	)		(23	)		(15	)
Interest expense		(3,518	)		(2,734	)		(9,922	)		(7,977	)
Loss on extinguishment of debt		(3	)		—			(410	)		—
Gain on real estate dispositions		—			—			13,407			—
Other income (loss)		(34	)		59			(182	)		(23	)
Income tax benefit (provision)		(118	)		43			(83	)		(135	)

Net income	$	4,337		$	2,754		$	22,740		$	7,533

General and administrative expenses for the three and nine months ended September 30, 2015 include noncash stock compensation expense of $0.2 million and $0.6 million, respectively. General and administrative expenses for the three and nine months ended September 30, 2014 include noncash stock compensation expense of $0.2 million and $0.5 million, respectively.