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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM
10-Q
☑    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended September 30, 2023  
or 
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from                      to                      
Commission File Number: 001-35908
ARMADA HOFFLER PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland46-1214914
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
222 Central Park Avenue,Suite 2100
Virginia Beach,Virginia23462
(Address of principal executive offices)(Zip Code)
 
(757) 366-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareAHHNew York Stock Exchange
6.75% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per shareAHHPrANew York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes     ☐  No 
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    ☒  Yes     ☐  No 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
☒
Accelerated Filer☐
Non-Accelerated Filer☐Smaller Reporting Company☐
Emerging Growth Company☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
☐ Yes     ☒  No
As of November 3, 2023, the registrant had 67,401,128 shares of common stock, $0.01 par value per share, outstanding. In addition, as of November 3, 2023, Armada Hoffler, L.P., the registrant's operating partnership subsidiary, had 21,553,062 units of limited partnership interest ("OP Units") outstanding (other than OP Units held by the registrant).

ARMADA HOFFLER PROPERTIES, INC.
 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2023
 
Table of Contents
 
 Page
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. Financial Information
 
Item 1.    Financial Statements
 
ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Balance Sheets
(In thousands, except par value and share data)
 September 30,
2023		December 31,
2022
 (Unaudited) 
ASSETS  
Real estate investments:  
Income producing property$2,089,170 $1,884,214 
Held for development6,294 6,294 
Construction in progress91,127 53,067 
 2,186,591 1,943,575 
Accumulated depreciation(376,449)(329,963)
Net real estate investments1,810,142 1,613,612 
Cash and cash equivalents32,662 48,139 
Restricted cash2,343 3,726 
Accounts receivable, net43,800 39,186 
Notes receivable, net83,713 136,039 
Construction receivables, including retentions, net87,295 70,822 
Construction contract costs and estimated earnings in excess of billings440 342 
Equity method investments125,672 71,983 
Operating lease right-of-use assets23,152 23,350 
Finance lease right-of-use assets92,570 45,878 
Acquired lease intangible assets127,020 103,870 
Other assets104,275 85,363 
Total Assets$2,533,084 $2,242,310 
LIABILITIES AND EQUITY  
Indebtedness, net$1,321,792 $1,068,261 
Accounts payable and accrued liabilities31,604 26,839 
Construction payables, including retentions108,107 93,472 
Billings in excess of construction contract costs and estimated earnings23,127 17,515 
Operating lease liabilities31,573 31,677 
Finance lease liabilities93,419 46,477 
Other liabilities56,818 54,055 
Total Liabilities1,666,440 1,338,296 
Stockholders’ equity:  
Preferred stock, $0.01 par value, 100,000,000 shares authorized:
6.75% Series A Cumulative Redeemable Perpetual Preferred Stock, 9,980,000 shares authorized; 6,843,418 shares issued and outstanding as of September 30, 2023 and
December 31, 2022
171,085 171,085 
Common stock, $0.01 par value, 500,000,000 shares authorized; 67,885,390 and 67,729,854 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively
679 677 
Additional paid-in capital589,291 587,884 
Distributions in excess of earnings(151,534)(126,875)
Accumulated other comprehensive income11,433 14,679 
Total stockholders’ equity620,954 647,450 
Noncontrolling interests in investment entities10,441 24,055 
Noncontrolling interests in Operating Partnership235,249 232,509 
Total Equity866,644 904,014 
Total Liabilities and Equity$2,533,084 $2,242,310 

See Notes to Condensed Consolidated Financial Statements.
1

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Comprehensive Income 
(In thousands, except per share data)
(Unaudited)
 Three Months Ended 
September 30,		Nine Months Ended 
September 30,
 2023202220232022
Revenues    
Rental revenues$62,913 $53,743 $179,082 $163,602 
General contracting and real estate services revenues99,408 69,024 286,220 138,947 
Interest income3,690 3,490 10,823 10,410 
Total revenues166,011 126,257 476,125 312,959 
Expenses    
Rental expenses14,756 12,747 41,392 38,101 
Real estate taxes5,867 5,454 16,910 16,695 
General contracting and real estate services expenses96,095 66,252 276,336 133,491 
Depreciation and amortization22,462 17,527 60,808 54,865 
Amortization of right-of-use assets - finance leases425 278 1,049 833 
General and administrative expenses4,286 3,854 13,786 12,179 
Acquisition, development, and other pursuit costs— — 18 37 
Impairment charges5 — 107 333 
Total expenses143,896 106,112 410,406 256,534 
Gain on real estate dispositions, net227 33,931 738 53,424 
Operating income22,342 54,076 66,457 109,849 
Interest expense (15,444)(10,345)(41,375)(28,747)
Loss on extinguishment of debt— (2,123)— (2,899)
Change in fair value of derivatives and other2,466 782 5,024 7,512 
Unrealized credit loss (provision) release(694)42 (871)(858)
Other income (expense), net63 118 324 415 
Income before taxes8,733 42,550 29,559 85,272 
Income tax (provision) benefit(310)(181)(834)140 
Net income8,423 42,369 28,725 85,412 
Net income attributable to noncontrolling interests:
Investment entities(193)(5,583)(616)(5,811)
Operating Partnership(1,290)(7,909)(4,597)(16,571)
Net income attributable to Armada Hoffler Properties, Inc.6,940 28,877 23,512 63,030 
Preferred stock dividends(2,887)(2,887)(8,661)(8,661)
Net income attributable to common stockholders$4,053 $25,990 $14,851 $54,369 
Net income attributable to common stockholders per share (basic and diluted)$0.06 $0.38 $0.22 $0.81 
Weighted-average common shares outstanding (basic and diluted)67,945 67,729 67,878 67,525 
Comprehensive income:    
Net income$8,423 $42,369 $28,725 $85,412 
Unrealized cash flow hedge gains3,488 7,108 9,868 18,780 
Realized cash flow hedge (gains) losses reclassified to net income(6,315)(366)(14,292)1,287 
Comprehensive income5,596 49,111 24,301 105,479 
Comprehensive income attributable to noncontrolling interests:
Investment entities(89)(5,659)(452)(5,987)
Operating Partnership(633)(9,465)(3,584)(21,227)
Comprehensive income attributable to Armada Hoffler Properties, Inc.$4,874 $33,987 $20,265 $78,265 

See Notes to Condensed Consolidated Financial Statements.
2

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Equity
(In thousands, except share data)
(Unaudited)
 Preferred stockCommon stockAdditional paid-in capitalDistributions in excess of earnings Accumulated other comprehensive incomeTotal stockholders' equityNoncontrolling interests in investment entitiesNoncontrolling interests in Operating PartnershipTotal equity
Balance, December 31, 2022$171,085 $677 $587,884 $(126,875)$14,679 $647,450 $24,055 $232,509 $904,014 
Net income— — — 4,709 — 4,709 154 554 5,417 
Unrealized cash flow hedge (losses) gains— — — — (328)(328)2 (100)(426)
Realized cash flow hedge gains reclassified to net income— — — — (2,211)(2,211)(39)(672)(2,922)
Net proceeds from issuance of common stock— — (149)— — (149)— — (149)
Restricted stock awards, net— 2 977 — — 979 — — 979 
Acquisitions of noncontrolling interests— — — — — — (12,834)— (12,834)
Distributions to noncontrolling interests— — — — — — (506)— (506)
Dividends declared on preferred stock— — — (2,887)— (2,887)— — (2,887)
Dividends and distributions declared on common shares and units ($0.19 per share and unit)
— — — (12,908)— (12,908)— (3,916)(16,824)
Balance, March 31, 2023171,085 679 588,712 (137,961)12,140 634,655 10,832 228,375 873,862 
Net income — — — 11,863 — 11,863 269 2,753 14,885 
Unrealized cash flow hedge gains— — — — 5,093 5,093 151 1,562 6,806 
Realized cash flow hedge gains reclassified to net income— — — — (3,735)(3,735)(174)(1,146)(5,055)
Restricted stock awards, net— — 337 — — 337 — — 337 
Issuance of operating partnership units for acquisitions— — — — — — — 12,194 12,194 
Redemption of operating partnership units— — (19)— — (19)— (564)(583)
Distributions to noncontrolling interests— — — — — — (427)— (427)
Dividends declared on preferred stock— — — (2,887)— (2,887)— — (2,887)
Dividends and distributions declared on common shares and units ($0.195 per share and unit)
— — — (13,248)— (13,248)— (4,222)(17,470)
Balance, June 30, 2023171,085 679 589,030 (142,233)13,498 632,059 10,651 238,952 881,662 
Net income— — — 6,940 — 6,940 193 1,290 8,423 
Unrealized cash flow hedge gains— — — — 2,580 2,580 86 822 3,488 
Realized cash flow hedge gains reclassified to net income— — — — (4,645)(4,645)(191)(1,479)(6,315)
Net proceeds from issuance of common stock— — (55)— — (55)— — (55)
Retirement of common stock— (1)(540)(102)— (643)— — (643)
Restricted stock awards, net— 1 866 — — 867 — — 867 
Redemption of operating partnership units— — (10)— — (10)— (112)(122)
Distributions to noncontrolling interests— — — — — — (298)— (298)
Dividends declared on preferred stock— — — (2,887)— (2,887)— — (2,887)
Dividends and distributions declared on common shares and units ($0.195 per share and unit)
— — — (13,252)— (13,252)— (4,224)(17,476)
Balance, September 30, 2023$171,085 $679 $589,291 $(151,534)$11,433 $620,954 $10,441 $235,249 $866,644 
3

 Preferred stockCommon stockAdditional paid-in capitalDistributions in excess of earnings Accumulated other comprehensive incomeTotal stockholders' equityNoncontrolling interests in investment entitiesNoncontrolling interests in Operating PartnershipTotal equity
Balance, December 31, 2021$171,085 $630 $525,030 $(141,360)$(33)$555,352 $629 $223,842 $779,823 
Net income— — — 9,993 — 9,993 100 2,183 12,276 
Unrealized cash flow hedge gains— — — — 5,907 5,907 — 1,815 7,722 
Realized cash flow hedge losses reclassified to net income— — — — 602 602 — 185 787 
Net proceeds from issuance of common stock— 45 65,149 — — 65,194 — — 65,194 
Noncontrolling interest in acquired real estate entity— — — — — — 23,065 — 23,065 
Restricted stock awards, net— — 1,064 — — 1,064 — — 1,064 
Acquisitions of noncontrolling interests— — (3,901)— — (3,901)— — (3,901)
Redemption of operating partnership units— — 132 — — 132 — (132)— 
Dividends declared on preferred stock— — — (2,887)— (2,887)— — (2,887)
Dividends and distributions declared on common shares and units ($0.17 per share and unit)
— — — (11,433)— (11,433)— (3,506)(14,939)
Balance, March 31, 2022171,085 675 587,474 (145,687)6,476 620,023 23,794 224,387 868,204 
Net income— — — 24,160 — 24,160 128 6,479 30,767 
Unrealized cash flow hedge gains— — — — 2,986 2,986 55 909 3,950 
Realized cash flow hedge losses reclassified to net income— — — 1 629 630 45 191 866 
Net proceeds from issuance of common stock— — (35)— — (35)— — (35)
Restricted stock awards, net— 2 573 — — 575 — — 575 
Contributions from noncontrolling interests— — — — — — 14 — 14 
Distributions to noncontrolling interests— — — — — — (84)— (84)
Dividends declared on preferred stock— — — (2,887)— (2,887)— — (2,887)
Dividends and distributions declared on common shares and units ($0.17 per share and unit)
— — — (11,529)— (11,529)— (3,505)(15,034)
Balance, June 30, 2022171,085 677 588,012 (135,942)10,091 633,923 23,952 228,461 886,336 
Net income— — — 28,877 — 28,877 5,583 7,909 42,369 
Unrealized cash flow hedge gains— — — — 5,393 5,393 74 1,641 7,108 
Realized cash flow hedge (gains) losses reclassified to net income— — — — (282)(282)1 (85)(366)
Restricted stock awards, net— — 713 — — 713 — — 713 
Redemption of operating partnership units— — (18)— — (18)— (112)(130)
Distributions to noncontrolling interests— — — — — — (5,423)— (5,423)
Dividends declared on preferred stock— — — (2,887)— (2,887)— — (2,887)
Dividends and distributions declared on common shares and units ($0.19 per share and unit)
— — — (12,886)— (12,886)— (3,920)(16,806)
Balance, September 30, 2022$171,085 $677 $588,707 $(122,838)$15,202 $652,833 $24,187 $233,894 $910,914 
See Notes to Condensed Consolidated Financial Statements.
4

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)(Unaudited)
 Nine Months Ended 
September 30,
 20232022
OPERATING ACTIVITIES  
Net income$28,725 $85,412 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation of buildings and tenant improvements46,742 40,770 
Amortization of leasing costs, in-place lease intangibles and below market ground rents - operating leases14,066 14,094 
Accrued straight-line rental revenue(4,748)(4,542)
Amortization of leasing incentives and above or below-market rents(1,749)(779)
Amortization of right-of-use assets - finance leases1,049 833 
Accrued straight-line ground rent expense55 97 
Unrealized credit loss provision871 858 
Adjustment for uncollectable lease accounts1,251 441 
Noncash stock compensation2,951 2,712 
Impairment charges107 333 
Noncash interest expense5,721 4,360 
Noncash loss on extinguishment of debt— 2,899 
Gain on real estate dispositions, net(738)(53,424)
Change in fair value of derivatives and other(1,974)(7,512)
Adjustment for receipts on off-market interest rate derivatives(3,155)— 
Changes in operating assets and liabilities:  
Property assets(4,439)(13,430)
Property liabilities5,113 3,189 
Construction assets(23,531)(34,971)
Construction liabilities21,770 42,051 
Interest receivable(9,797)(5,124)
Net cash provided by operating activities78,290 78,267 
INVESTING ACTIVITIES  
Development of real estate investments(40,538)(62,388)
Tenant and building improvements(16,004)(11,743)
Acquisitions of real estate investments, net of cash received(8,394)(93,389)
Dispositions of real estate investments, net of selling costs246 251,492 
Notes receivable issuances(42,010)(24,235)
Notes receivable paydowns— 13,239 
Payments to purchase off-market interest rate derivatives(16,856)— 
Receipts on off-market interest rate derivatives3,155 — 
Leasing costs(3,217)(3,814)
Leasing incentives(20)(51)
Contributions to equity method investments(53,689)(51,565)
Net cash (used for) provided by investing activities(177,327)17,546 
FINANCING ACTIVITIES  
Proceeds from issuance of common stock, net of issuance cost(204)65,159 
Common shares tendered for tax withholding(1,111)(774)
Debt issuances, credit facility, and construction loan borrowings310,402 491,514 
Debt and credit facility repayments, including principal amortization(162,393)(563,435)
Debt issuance costs(2,839)(6,727)
Acquisition of NCI in consolidated RE investments— (3,901)
Redemption of operating partnership units(705)(130)
Distributions to noncontrolling interests(1,231)(5,507)
Contributions from noncontrolling interests— 14 
Dividends and distributions(59,742)(52,904)
Net cash provided by (used for) financing activities82,177 (76,691)
Net (decrease) increase in cash, cash equivalents, and restricted cash(16,860)19,122 
Cash, cash equivalents, and restricted cash, beginning of period51,865 40,443 
Cash, cash equivalents, and restricted cash, end of period (1)
$35,005 $59,565 
See Notes to Condensed Consolidated Financial Statements.
5

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(In thousands)(Unaudited)
Nine Months Ended 
September 30,
20232022
Supplemental Disclosures (noncash transactions):
Increase in dividends and distributions payable$683 $2,536 
Increase (decrease) in accrued capital improvements and development costs2,033 (5,139)
Increase in settlement liability for the repurchase of common stock643 — 
Issuance of operating partnership units for acquisitions12,194 — 
Operating Partnership units redeemed for common shares— 132 
Debt assumed at fair value in conjunction with real estate purchases105,584 156,071 
Note receivable redeemed in conjunction with real estate purchase90,232 — 
Acquisitions of noncontrolling interests12,834 — 
Noncontrolling interest in acquired real estate entity— 23,065 
Other liability satisfied in connection with a real estate disposal750 — 
Recognition of operating lease right-of-use assets — 110 
Recognition of operating lease liabilities — 110 
Recognition of finance lease right-of-use assets47,742 — 
Recognition of finance lease liabilities46,616 — 

(1) The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the Condensed Consolidated Statements of Cash Flows (in thousands):
 September 30, 2023September 30, 2022
Cash and cash equivalents$32,662 $54,700 
Restricted cash (a)
2,343 4,865 
Cash, cash equivalents, and restricted cash$35,005 $59,565 
(a) Restricted cash represents amounts held by lenders for real estate taxes, insurance, and reserves for capital improvements.




See Notes to Condensed Consolidated Financial Statements.

6

ARMADA HOFFLER PROPERTIES, INC.
Notes to Condensed Consolidated Financial Statements
 (Unaudited)
 
1. Business of Organization
 
Armada Hoffler Properties, Inc. (the "Company") is a vertically integrated, self-managed real estate investment trust ("REIT") with over four decades of experience developing, building, acquiring, and managing high-quality retail, office, and multifamily properties located primarily in the Mid-Atlantic and Southeastern United States. The Company also provides general construction and development services to third-party clients, in addition to developing and building properties to be placed in their stabilized portfolio.

The Company is the sole general partner of Armada Hoffler, L.P. (the "Operating Partnership") and, as of September 30, 2023, owned 75.8% of the economic interest in the Operating Partnership, of which 0.1% is held as general partnership units. The operations of the Company are carried on primarily through the Operating Partnership and the wholly owned subsidiaries thereof.
 
As of September 30, 2023, the Company's property portfolio consisted of 59 stabilized operating properties and two properties under development or not stabilized.

Refer to Note 5 for information related to the Company's recent acquisitions and dispositions of properties.

2. Significant Accounting Policies
 
Basis of Presentation
 
The accompanying condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles ("GAAP").
 
The condensed consolidated financial statements include the financial position and results of operations of the Company and its subsidiaries. The Company’s subsidiaries include the Operating Partnership and the subsidiaries that are wholly owned or in which the Company has a controlling interest, including where the Company has been determined to be a primary beneficiary of a variable interest entity ("VIE") in accordance with the consolidation guidance of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). All significant intercompany transactions and balances have been eliminated in consolidation.

In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition, and results of operations for the interim periods presented.

The accompanying condensed consolidated financial statements were prepared in accordance with the requirements for interim financial information. Accordingly, these interim financial statements have not been audited and exclude certain disclosures required for annual financial statements. Also, the operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These interim financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed. Such estimates are based on management’s historical experience and best judgment after considering past, current, and expected events and economic conditions. Actual results could differ significantly from management’s estimates.
7


Reclassifications

Certain items have been reclassified from their prior year classifications to conform to the current year presentation. Effective for the nine months ended September 30, 2023, the Company has changed the presentation of its condensed consolidated statements of comprehensive income. For the three and nine months ended September 30, 2022, the Company reclassified interest income of $3.5 million and $10.4 million, respectively, from non-operating income to operating income. As a result, total revenues and operating income increased by $3.5 million and $10.4 million, respectively, compared to previous reporting. These reclassifications had no effect on net income or stockholder's equity as previously reported.

Recent Accounting Pronouncements

Reference Rate Reform

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04 Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848), which became effective on March 12, 2020. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives, and other contracts. This ASU also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. Application of the guidance is optional and only available in certain situations. In January 2021, FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The amendments in this standard are elective and principally apply to entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Similar to ASU No. 2020-04, provisions of this ASU are effective upon issuance. In December 2022, FASB issued ASU 2022-06 Deferral of the Sunset Date of Topic 848 which became effective immediately upon issuance. ASU 2022-06 deferred the sunset date of Topic 848 to December 31, 2024. During the nine months ended September 30, 2023, the Company elected to apply the practical expedients to modifications of qualifying contracts as continuations of the existing contracts rather than as new contracts. The adoption of the new guidance did not have a material impact on the consolidated financial statements.

Derivative Financial Instruments

The Company may enter into interest rate derivatives to manage exposure to interest rate risks. The Company does not use derivative financial instruments for trading or speculative purposes. The Company recognizes derivative financial instruments at fair value and presents them within other assets and liabilities in the condensed consolidated balance sheets. Gains and losses from derivatives that are neither designated nor qualify as hedging instruments are recognized within the change in fair value of derivatives and other caption in the condensed consolidated statements of comprehensive income. For derivatives that qualify as cash flow hedges, the gain or loss is reported as a component of other comprehensive income (loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.

For interest rate caps that qualify as cash flow hedges, the premium paid by the Company at inception represents the time value of the instrument and is excluded from the hedge effectiveness assessment. The excluded component is amortized over the life of the derivative instrument and presented within interest expense in the condensed consolidated statements of comprehensive income.

Cash flows for derivative financial instruments are classified as cash flows from operating activities within the condensed consolidated statements of cash flows, unless there is an other-than-insignificant financing element present at inception of the derivative. For derivatives with an other-than-insignificant financing element at inception due to off-market terms, cash flows are classified as cash flows from investing or financing activities within the condensed consolidated statements of cash flows depending on the derivative's off-market nature at inception.

Other Accounting Policies

See the Company's Annual Report on Form 10-K for the year ended December 31, 2022 for a description of other accounting principles upon which basis the accompanying consolidated financial statements were prepared.

8

3. Segments
 
The Company operates its business in five reportable segments: (i) retail real estate, (ii) office real estate, (iii) multifamily real estate, (iv) general contracting and real estate services, and (v) real estate financing. Refer to Note 1 of the Company's Form 10-K for the composition of properties within each property segment. Since the Company's Annual Report on Form 10-K for the year ended December 31, 2022, the Company introduced real estate financing as a reportable segment. The real estate financing segment includes the Company's mezzanine loans and preferred equity investments on development projects. The change in segmental presentation is a result of the chief operating decision-maker now separately reviewing the results of the real estate financing investments, which are no longer considered to be ad hoc investments, but an evolving portfolio.

Net operating income ("NOI") is the primary measure used by the Company’s chief operating decision-maker to assess segment performance. NOI is calculated as segment revenues less segment expenses. Segment revenues include rental revenues for the property segments, general contracting and real estate services revenues for the general contracting and real estate services segment, and interest income for the real estate financing segment. Segment expenses include rental expenses and real estate taxes for the property segments, general contracting and real estate services expenses for the general contracting and real estate services segment, and interest expense for the real estate financing segment. Segment NOI for the general contracting and real estate services and real estate financing segments is also referred to as segment gross profit as illustrated in the table below. NOI 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, NOI should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate NOI in the same manner. The Company considers NOI 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 real estate financing businesses.

The following table presents NOI for the Company's five reportable segments for the three and nine months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Retail real estate
Rental revenues$25,858 $21,223 $73,004 $64,197 
Rental expenses4,125 3,420 11,715 10,254 
Real estate taxes2,312 2,206 6,789 6,715 
Segment net operating income19,421 15,597 54,500 47,228 
Office real estate
Rental revenues22,077 18,687 62,156 54,024 
Rental expenses5,925 4,886 16,282 13,626 
Real estate taxes2,262 2,044 6,524 5,583 
Segment net operating income13,890 11,757 39,350 34,815 
Multifamily real estate
Rental revenues14,978 13,833 43,922 45,381 
Rental expenses4,706 4,441 13,395 14,221 
Real estate taxes1,293 1,204 3,597 4,397 
Segment net operating income8,979 8,188 26,930 26,763 
General contracting and real estate services
General contracting and real estate services revenues99,408 69,024 286,220 138,947 
General contracting and real estate services expenses96,095 66,252 276,336 133,491 
Segment gross profit3,313 2,772 9,884 5,456 
Real estate financing
Interest income3,496 3,372 10,257 10,070 
Interest expense(a)
728 840 2,634 2,482 
Segment gross profit2,768 2,532 7,623 7,588 
Net operating income$48,371 $40,846 $138,287 $121,850 
________________________________________
(a) Interest expense within the real estate financing segment is allocated based on the average outstanding principal of notes receivable in the real estate financing portfolio, and the effective interest rate on the credit facility, as defined in Note 8.
9


The following table reconciles NOI to net income, the most directly comparable GAAP measure, for the three and nine months ended September 30, 2023 and 2022 (in thousands):