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, 2018 and 2017 was as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(Unaudited)
Office real estate
Rental revenues	$	5,149	$	4,762	$	15,537	$	14,427
Rental expenses	1,551		1,447		4,435		4,138
Real estate taxes	515		481		1,519		1,381
Segment net operating income	3,083		2,834		9,583		8,908
Retail real estate
Rental revenues	16,932		15,880		50,251		47,089
Rental expenses	2,761		2,699		7,974		7,698
Real estate taxes	1,703		1,588		5,041		4,557
Segment net operating income	12,468		11,593		37,236		34,834
Multifamily residential real estate
Rental revenues	6,849		6,454		20,439		19,567
Rental expenses	2,791		2,684		7,640		7,233
Real estate taxes	622		624		1,828		1,859
Segment net operating income	3,436		3,146		10,971		10,475
General contracting and real estate services
Segment revenues	19,950		41,201		63,654		161,391
Segment expenses	18,973		39,377		61,474		154,588
Segment gross profit	977		1,824		2,180		6,803
Net operating income	$	19,964	$	19,397	$	59,970	$	61,020

General contracting and real estate services revenues for the three months ended September 30, 2018 and 2017 exclude revenue related to intercompany construction contracts of $38.5 million and $13.9 million, respectively. General contracting and real estate services revenues for the nine months ended September 30, 2018 and 2017 exclude revenue related to intercompany construction contracts of $98.6 million and $31.3 million, respectively.

General contracting and real estate services expenses for the three months ended September 30, 2018 and 2017 exclude expenses related to intercompany construction contracts of $38.2 million and $13.7 million, respectively. General contracting and real estate services expenses for the nine months ended September 30, 2018 and 2017 exclude expenses related to intercompany construction contracts of $97.7 million and $31.0 million, respectively.

General contracting and real estate services expenses for the three months ended September 30, 2018 and 2017 include noncash stock compensation expense of less than $0.1 million for each period. General contracting and real estate services expenses for the nine months ended September 30, 2018 and 2017 include noncash stock compensation expense of $0.2 million for each period.

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, 2018 and 2017 (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Unaudited)
Net operating income	$	19,964		$	19,397		$	59,970		$	61,020
Depreciation and amortization	(10,196		)	(9,239		)	(28,653		)	(28,018		)
General and administrative expenses	(2,367		)	(2,098		)	(8,092		)	(7,762		)
Acquisition, development and other pursuit costs	(69		)	(61		)	(162		)	(477		)
Impairment charges	(3		)	(19		)	(101		)	(50		)
Interest income	2,545			1,910			7,152			4,966
Interest expense	(4,677		)	(4,253		)	(13,547		)	(13,282		)
Loss on extinguishment of debt	(11		)	—			(11		)	—
Gain on real estate dispositions	—			4,692			—			8,087
Change in fair value of interest rate derivatives	298			87			1,256			300
Other income	65			74			233			154
Income tax benefit (provision)	120			(29		)	552			(781		)
Net income	$	5,669		$	10,461		$	18,597		$	24,157

General and administrative expenses for the three months ended September 30, 2018 and 2017 include noncash stock compensation expense of $0.2 million for each period. General and administrative expenses for the nine months ended September 30, 2018 and 2017 include noncash stock compensation expense of $0.9 million and $0.8 million, respectively.