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, 2016 and 2015 was as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(Unaudited)
Office real estate
Rental revenues	$	5,277	$	8,092	$	16,097	$	23,847
Rental expenses	1,553		1,758		4,307		5,216
Real estate taxes	485		734		1,550		2,228
Segment net operating income	3,239		5,600		10,240		16,403
Retail real estate
Rental revenues	14,340		8,523		41,485		22,715
Rental expenses	2,264		1,478		6,820		4,223
Real estate taxes	1,339		810		3,953		2,080
Segment net operating income	10,737		6,235		30,712		16,412
Multifamily residential real estate
Rental revenues	5,688		4,688		15,257		12,839
Rental expenses	2,017		1,629		5,107		4,817
Real estate taxes	532		512		1,584		1,364
Segment net operating income	3,139		2,547		8,566		6,658
General contracting and real estate services
Segment revenues	38,552		53,822		108,555		129,959
Segment expenses	37,274		51,716		104,336		125,141
Segment gross profit	1,278		2,106		4,219		4,818
Net operating income	$	18,393	$	16,488	$	53,737	$	44,291

General contracting and real estate services revenues for the three and nine months ended September 30, 2016 exclude revenue related to intercompany construction contracts of $7.8 million and $40.7 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2016 exclude expenses related to intercompany construction contracts of $7.6 million and $40.2 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2016 include noncash stock compensation expense of less than $0.1 million and $0.4 million, respectively.

General contracting and real estate services revenues for the three and nine months ended September 30, 2015 exclude revenue from 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 for 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.

The following table reconciles net operating income to net income for the three and nine months ended September 30, 2016 and 2015 (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(Unaudited)
Net operating income	$	18,393		$	16,488		$	53,737		$	44,291
Depreciation and amortization	(8,885		)	(6,317		)	(25,636		)	(16,991		)
General and administrative expenses	(2,156		)	(1,873		)	(6,864		)	(6,297		)
Acquisition, development and other pursuit costs	(345		)	(288		)	(1,486		)	(1,050		)
Impairment charges	(149		)	—			(184		)	(23		)
Interest income	1,024			—			1,928			—
Interest expense	(4,124		)	(3,518		)	(11,893		)	(9,922		)
Loss on extinguishment of debt	(82		)	(3		)	(82		)	(410		)
Gain on real estate dispositions	3,753			—			30,440			13,407
Change in fair value of interest rate derivatives	498			(51		)	(2,264		)	(238		)
Other income	35			17			154			56
Income tax provision	(16		)	(118		)	(240		)	(83		)
Net income	$	7,946		$	4,337		$	37,610		$	22,740

General and administrative expenses for the three and nine months ended September 30, 2016 include noncash stock compensation expense of $0.1 million and $0.6 million, respectively. 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.