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, 2017 and 2016 was as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(Unaudited)
Office real estate
Rental revenues	$	4,759	$	5,299	$	9,665	$	10,820
Rental expenses	1,366		1,298		2,692		2,754
Real estate taxes	450		526		900		1,065
Segment net operating income	2,943		3,475		6,073		7,001
Retail real estate
Rental revenues	15,578		14,113		31,209		27,145
Rental expenses	2,479		2,220		4,999		4,556
Real estate taxes	1,520		1,330		2,969		2,614
Segment net operating income	11,579		10,563		23,241		19,975
Multifamily residential real estate
Rental revenues	6,418		4,839		13,113		9,569
Rental expenses	2,326		1,553		4,548		3,090
Real estate taxes	625		526		1,235		1,052
Segment net operating income	3,467		2,760		7,330		5,427
General contracting and real estate services
Segment revenues	56,671		33,200		120,190		70,003
Segment expenses	54,015		32,025		115,211		67,062
Segment gross profit	2,656		1,175		4,979		2,941
Net operating income	$	20,645	$	17,973	$	41,623	$	35,344

General contracting and real estate services revenues for the three months ended June 30, 2017 and 2016 exclude revenue related to intercompany construction contracts of $11.6 million and $17.9 million, respectively. General contracting services revenues for the six months ended June 30, 2017 and 2016 exclude revenue related to intercompany construction contracts of $17.5 million and $32.9 million, respectively.

General contracting and real estate services expenses for the three months ended June 30, 2017 and 2016 exclude expenses related to intercompany construction contracts of $11.6 million and $17.8 million, respectively. General contracting and real estate services expenses for the six months ended June 30, 2017 and 2016 exclude expenses related to intercompany construction contracts of $17.3 million and $32.6 million.

General contracting and real estate services expenses for the three months ended June 30, 2017 and 2016 include noncash stock compensation expense of less than $0.1 million and $0.1 million, respectively. General contracting and real estate services expenses for the six months ended June 30, 2017 and 2016 include noncash stock compensation expense of $0.4 million and $0.3 million, respectively.

The following table reconciles net operating income to net income, the most directly comparable GAAP measure, for the three and six months ended June 30, 2017 and 2016 (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(Unaudited)
Net operating income	$	20,645		$	17,973		$	41,623		$	35,344
Depreciation and amortization	(9,304		)	(8,602		)	(18,779		)	(16,751		)
General and administrative expenses	(2,678		)	(2,224		)	(5,664		)	(4,708		)
Acquisition, development and other pursuit costs	(369		)	(437		)	(416		)	(1,141		)
Impairment charges	(27		)	—			(31		)	(35		)
Interest income	1,658			722			3,056			904
Interest expense	(4,494		)	(3,978		)	(9,029		)	(7,769		)
Gain on real estate dispositions	—			13			3,395			26,687
Change in fair value of interest rate derivatives	(81		)	(373		)	213			(2,762		)
Other income	43			43			80			119
Income tax provision	(450		)	(6		)	(752		)	(224		)
Net income	$	4,943		$	3,131		$	13,696		$	29,664

General and administrative expenses for the three months ended June 30, 2017 and 2016 include noncash stock compensation expense of $0.2 million and $0.2 million, respectively. General and administrative expenses for the six months ended June 30, 2017 and 2016 include noncash stock compensation expense of $0.6 million and $0.5 million, respectively.