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, construction, and lending businesses.

Net operating income of the Company’s reportable segments for the three months ended March 31, 2019 and 2018 was as follows (in thousands):



	Three Months Ended March 31,
	2019		2018
	(Unaudited)
Office real estate
Rental revenues	$	5,556	$	5,100
Rental expenses	1,486		1,446
Real estate taxes	526		502
Segment net operating income	3,544		3,152
Retail real estate
Rental revenues	17,257		16,711
Rental expenses	2,600		2,657
Real estate taxes	1,811		1,683
Segment net operating income	12,846		12,371
Multifamily residential real estate
Rental revenues	8,096		6,888
Rental expenses	2,639		2,321
Real estate taxes	791		628
Segment net operating income	4,666		3,939
General contracting and real estate services
Segment revenues	17,036		23,050
Segment expenses	16,286		22,414
Segment gross profit	750		636
Net operating income	$	21,806	$	20,098

Rental expenses represent costs directly associated with the operation and management of the Company’s real estate properties. Rental expenses include asset management fees, property management fees, repairs and maintenance, insurance, and utilities.

General contracting and real estate services revenues for the three months ended March 31, 2019 and 2018 exclude revenue related to intercompany construction contracts of $30.2 million and $25.9 million, respectively.

General contracting and real estate services expenses for the three months ended March 31, 2019 and 2018 exclude expenses related to intercompany construction contracts of $29.9 million and $25.6 million, respectively.

General contracting and real estate services expenses for the three months ended March 31, 2019 and 2018 include noncash stock compensation expense of $0.2 million and $0.1 million, respectively.

The following table reconciles net operating income to net income, the most directly comparable GAAP measure, for the three months ended March 31, 2019 and 2018 (in thousands):



	Three Months Ended March 31,
	2019			2018
	(Unaudited)
Net operating income	$	21,806		$	20,098
Depreciation and amortization	(9,904		)	(9,278		)
General and administrative expenses	(3,401		)	(2,961		)
Acquisition, development, and other pursuit costs	(400		)	(84		)
Interest income	5,319			2,232
Interest expense	(5,886		)	(4,373		)
Equity in income of unconsolidated real estate entities	273			—
Change in fair value of interest rate derivatives	(1,463		)	969
Other income	60			114
Income tax benefit	110			266
Net income	$	6,514		$	6,983

General and administrative expenses represent costs not directly associated with the operation and management of the Company’s real estate properties and general contracting and real estate services businesses. General and administrative expenses include corporate office personnel salaries and benefits, bank fees, accounting fees, legal fees and other corporate office expenses. General and administrative expenses for the three months ended March 31, 2019 and 2018 include noncash stock compensation expense of $0.5 million and $0.5 million, respectively.