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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(Unaudited)
Office real estate
Rental revenues	$	4,762	$	5,277	$	14,427	$	16,097
Rental expenses	1,447		1,553		4,138		4,307
Real estate taxes	481		485		1,381		1,550
Segment net operating income	2,834		3,239		8,908		10,240
Retail real estate
Rental revenues	15,880		14,340		47,089		41,485
Rental expenses	2,699		2,264		7,698		6,820
Real estate taxes	1,588		1,339		4,557		3,953
Segment net operating income	11,593		10,737		34,834		30,712
Multifamily residential real estate
Rental revenues	6,454		5,688		19,567		15,257
Rental expenses	2,684		2,017		7,233		5,107
Real estate taxes	624		532		1,859		1,584
Segment net operating income	3,146		3,139		10,475		8,566
General contracting and real estate services
Segment revenues	41,201		38,552		161,391		108,555
Segment expenses	39,377		37,274		154,588		104,336
Segment gross profit	1,824		1,278		6,803		4,219
Net operating income	$	19,397	$	18,393	$	61,020	$	53,737

General contracting and real estate services revenues for the three months ended September 30, 2017 and 2016 exclude revenue related to intercompany construction contracts of $13.9 million and $7.9 million, respectively. General contracting services revenues for the nine months ended September 30, 2017 and 2016 exclude revenue related to intercompany construction contracts of $31.3 million and $40.7 million, respectively.

General contracting and real estate services expenses for the three months ended September 30, 2017 and 2016 exclude expenses related to intercompany construction contracts of $13.7 million and $7.7 million, respectively. General contracting and real estate services expenses for the nine months ended September 30, 2017 and 2016 exclude expenses related to intercompany construction contracts of $31.0 million and $40.2 million, respectively.

General contracting and real estate services expenses for the three months ended September 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 nine months ended September 30, 2017 and 2016 include noncash stock compensation expense of $0.2 million and $0.4 million, respectively.

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Unaudited)
Net operating income	$	19,397		$	18,393		$	61,020		$	53,737
Depreciation and amortization	(9,239		)	(8,885		)	(28,018		)	(25,636		)
General and administrative expenses	(2,098		)	(2,156		)	(7,762		)	(6,864		)
Acquisition, development and other pursuit costs	(61		)	(345		)	(477		)	(1,486		)
Impairment charges	(19		)	(149		)	(50		)	(184		)
Interest income	1,910			1,024			4,966			1,928
Interest expense	(4,253		)	(4,124		)	(13,282		)	(11,893		)
Loss on extinguishment of debt	—			(82		)	—			(82		)
Gain on real estate dispositions	4,692			3,753			8,087			30,440
Change in fair value of interest rate derivatives	87			498			300			(2,264		)
Other income	74			35			154			154
Income tax provision	(29		)	(16		)	(781		)	(240		)
Net income	$	10,461		$	7,946		$	24,157		$	37,610

General and administrative expenses for the three months ended September 30, 2017 and 2016 include noncash stock compensation expense of $0.2 million and $0.1 million, respectively. General and administrative expenses for the nine months ended September 30, 2017 and 2016 include noncash stock compensation expense of $0.8 million and $0.6 million, respectively.