UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

or

o		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: 000-49986

AMERICA FIRST APARTMENT INVESTORS, INC.

(Exact name of registrant as specified in its charter)

Maryland		47-0858301
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)
1004 Farnam Street, Suite 100 Omaha, Nebraska		68102
(Address of principal executive offices)		(Zip Code)

(402) 557-6360
(Registrant’s telephone number, including area code)

     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 þ          NO o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o           Accelerated filer þ           Non- accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o          NO þ

As of May 4, 2007, there were 11,046,111 outstanding shares of the registrant’s common stock.

 

 

AMERICA FIRST APARTMENT INVESTORS, INC.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006			1
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2007 and 2006			2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006			3
Notes to the Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3. Quantitative and Qualitative Disclosures about Market Risk			22
Item 4. Controls and Procedures			22
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			23
Item 1A. Risk Factors			23
Item 6. Exhibits			23
SIGNATURES			24
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

Forward-Looking Statements

This report (including, but not limited to, the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) contains forward-looking statements that reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, the Company’s performance and financial results. All statements, trend analysis and other information concerning possible or assumed future results of operations of the Company and the real estate investments it has made constitute forward-looking statements. Shareholders and others should understand that these forward-looking statements are subject to numerous risks and uncertainties, and a number of factors could affect the future results of the Company and could cause those results to differ materially from those expressed in the forward-looking statements contained herein. These factors include local and national economic conditions, the amount of new construction, affordability of home ownership, interest rates on single-family home mortgages and on the Company’s variable-rate borrowings, government regulation, price inflation, the level of real estate and other taxes imposed on the properties, labor problems and natural disasters and other items discussed under “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and in Item 1A of Part II of this report.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except shares and per share amounts)

		March 31,				December 31,
		2007				2006
Assets
Cash and cash equivalents		$	6,049			$	5,724
Restricted cash			8,824				9,391
Real estate assets:
Land			41,657				41,657
Buildings and improvements			343,401				342,222
Total			385,058				383,879
Less: accumulated depreciation			(47,746	)			(44,418	)
Real estate assets, net			337,312				339,461
Assets of discontinued operations			7,080				17,811
Investments in corporate equity securities, at fair value			3,521				3,526
In-place lease intangibles, net of accumulated amortization of $7,792 and $7,105, respectively			1,244				1,931
Other assets			6,869				7,920
Total assets		$	370,899			$	385,764
Liabilities
Accounts payable and accrued expenses		$	10,149			$	11,332
Dividends payable			2,982				2,872
Notes payable			—				2,413
Bonds and mortgage notes payable			250,483				249,651
Borrowings under repurchase agreements			4,800				12,825
Total liabilities			268,414				279,093
Contingencies
Stockholders’ Equity
Common stock, $0.01 par value; 500,000,000 shares authorized, 11,046,111 and 11,045,558 issued and outstanding			110				110
Additional paid-in capital			110,461				110,421
Accumulated deficit			(8,171	)			(4,084	)
Accumulated other comprehensive income			85				224
Total stockholders’ equity			102,485				106,671
Total liabilities and stockholders’ equity		$	370,899			$	385,764

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(in thousands, except per share amounts)

		For the three				For the three
		months ended				months ended
		March 31, 2007				March 31, 2006
Revenues:
Rental revenues		$	14,401			$	10,792
Other revenues			16				60
Total revenues			14,417				10,852
Operating Expenses:
Real estate operating			6,282				4,640
Depreciation			3,382				2,242
General and administrative			1,524				1,222
Property management			376				296
In-place lease amortization			687				269
Intangible asset impairment			—				199
Total operating expenses			12,251				8,868
Operating income			2,166				1,984
Interest and dividend income			141				937
Impairment of securities			—				(344	)
Interest expense			(3,501	)			(2,618	)
Loss from continuing operations			(1,194	)			(41	)
Income from discontinued operations			104				213
Net income (loss)			(1,090	)			172
Other comprehensive income (loss):
Unrealized holding losses on securities arising during the period			(5	)			(42	)
Reclassification adjustments for losses realized in net income (loss)			—				344
Unrealized gains (losses) on derivatives			(134	)			101
			(139	)			403
Comprehensive income (loss)		$	(1,229	)		$	575
Earnings per share — basic and diluted:
Loss from continuing operations		$	(0.11	)		$	(0.00	)
Income from discontinued operations			0.01				0.02
Net income (loss)		$	(0.10	)		$	0.02
Dividends declared per share		$	0.27			$	0.25
Weighted average number of shares outstanding — basic			11,046				11,036
Weighted average number of shares outstanding — diluted			11,046				11,036

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

		For the three				For the three
		months ended				months ended
		March 31, 2007				March 31, 2006
Operating activities:
Net income (loss)		$	(1,090	)		$	172
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation			3,435				2,503
Impairment of securities			—				344
Intangible asset impairment			—				199
Change in fair value on interest rate swap agreements			92				(75	)
Amortization			727				321
Non-cash stock based compensation			40				12
Change in other assets			745				417
Change in accounts payable and accrued expenses			(1,183	)			(175	)
Net cash provided by operating activities			2,766				3,718
Investing activities:
Capital improvements and real estate acquisitions			(1,216	)			(32,876	)
Proceeds from sales of discontinued operations			10,705				—
Principal received on agency securities			—				1,463
Change in restricted cash			567				29,508
Proceeds from principal repayment of mezzanine loan			—				7,094
Net cash provided by investing activities			10,056				5,189
Financing activities:
Proceeds from mortgage notes payable			10,000				—
Repayment of note payable borrowings			(2,413	)			—
Repayments of borrowings under repurchase agreements			(8,025	)			(6,000	)
Dividends and dividend equivalents paid			(2,887	)			(2,759	)
Debt financing costs paid			(4	)			—
Principal payments on bonds and mortgage notes payable			(9,168	)			(334	)
Net cash used in financing activities			(12,497	)			(9,093	)
Change in cash and cash equivalents			325				(186	)
Cash and cash equivalents at beginning of year			5,724				4,743
Cash and cash equivalents at end of period		$	6,049			$	4,557
Supplemental disclosure of cash flow information:
Dividends declared but not paid		$	2,982			$	2,759
Cash paid for interest		$	3,804			$	2,669

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2007

(UNAUDITED)

1. Organization and Basis of Presentation

America First Apartment Investors, Inc. (the “Company”) is a Maryland corporation which owns and operates multifamily apartment projects and an office warehouse facility. The Company is also authorized to invest in mortgage-backed securities and other residential-based real estate assets.

The Company is treated as a Real Estate Investment Trust (“REIT”) for Federal income tax purposes. As a REIT, the Company is generally not subject to Federal income taxes on distributed income. To maintain qualification as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute at least 90% of the REIT’s ordinary taxable income to shareholders.

The accompanying interim unaudited condensed consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial position as of March 31, 2007, and the results of operations for all periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. Acquisition of Real Estate Assets

In the first quarter of 2006, the Company completed the acquisition of two properties, The Greenhouse, a 126-unit complex located in Omaha, Nebraska, and the Arbors of Dublin, a 288-unit complex located in a suburb of Columbus, Ohio. The aggregate purchase price for these properties was $33.2 million, including $792,000 of in-place lease intangible assets which will be amortized over the weighted average lives of the respective leases. These purchases were primarily funded from the proceeds received from the fourth quarter 2005 divestiture of St. Andrews of Westwood. There were no properties purchased during the first quarter of 2007.

3. Discontinued Operations

As of March 31, 2007, the Company has designated two properties, The Exchange at Palm Bay (“Exchange”) and Waters Edge as held for sale pursuant to Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. The Company is currently marketing both properties to prospective buyers and it expects the properties will be sold in the next three to twelve months for amounts exceeding their respective net book values. Additionally, on January 31, 2007, the Company completed the sale of Cumberland Trace Apartments for proceeds of $10.7 million, net of $176,000 of closing costs. There was no gain or loss recognized on the sale. In connection with the sale, the $8.9 million short-term note which was undertaken to finance the acquisition of Cumberland Trace was repaid.

During the last three quarters of 2006, the Company completed the divestitures of the Park at 58 Apartments, the Belvedere Apartments, and Delta Crossing for proceeds of $34.9 million, net of closing costs of $1.0 million.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)

The results of operations for the properties sold during 2007 and 2006, as well as the properties which are held for sale, are as follows (in thousands):

		For the three months				For the three months
		ended March 31, 2007				ended March 31, 2006
Revenues		$	595			$	1,372
Operating expenses			(372	)			(998	)
Other expenses, net			(119	)			(161	)
Income from discontinued operations		$	104			$	213

4. Credit Facility Borrowings

During 2006, the Company entered into a Master Credit Facility and Reimbursement Agreement (the “Facility”) with Wells Fargo Bank, N.A. and Fannie Mae. The Facility provides the Company the ability to borrow at either fixed or variable interest rates and also enables the Company to utilize Fannie Mae credit enhancement on tax exempt bond financings on its existing portfolio or for future property acquisitions.

When established, the Facility provided the Company the ability, until September 28, 2007, to borrow an additional $21.6 million at a fixed interest rate of 5.68%. On January 25, 2007, the Company drew down $10.0 million of the available $21.6 million. The proceeds were utilized to repay $7.6 million of the Company’s repurchase agreement borrowings, and to repay the $2.4 million of notes payable which were assumed in the 2004 merger with America First Real Estate Investment Partners, L.P. The additional borrowing under the Facility has a term of 10 years from the date of the transaction.

5. Impairment and Sale of Agency Securities

During the first quarter of 2006, the Company determined that it would not recover the previously unrecognized losses recorded in accumulated other comprehensive income associated with its agency securities and, accordingly, recognized an impairment loss of $344,000. This loss was equal to the difference between the Company’s basis in the agency securities and their fair value on March 31, 2006. On April 24, 2006, the Company sold substantially all of its agency securities for $15.7 million, which resulted in the recognition of an additional loss of $53,000 in the second quarter of 2006. The entire proceeds were utilized to repay repurchase agreement borrowings and accrued interest thereon.

6. Impairment of Intangible Assets

In connection with the November 2004 acquisition of certain property management assets from America First Properties Management Company, LLC, the Company assumed property management agreements for five apartment complexes owned by unrelated third parties. The estimated fair value of these contracts was recorded as an intangible asset in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. During the first quarter of 2006, the Company purchased The Greenhouse, which was one of the properties for which it previously provided management services under these contracts. Additionally, the Company became aware that a significant percentage of the other properties for which it provides third party management services were expected to be sold during 2006. As a result, the Company determined that a portion of the intangible asset was impaired and has recorded an expense of $199,000 in the condensed consolidated statement of operations and comprehensive income (loss) for the three months ended March 31, 2006.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)

7. Borrowings under Repurchase Agreements

Borrowings under repurchase agreements as of March 31, 2007 and December 31, 2006 consisted of the following (in thousands):

		Interest		Maturity				Carrying Amount
Collateral		Rate		Date		Payment Schedule		March 31, 2007				December 31, 2006
Repurchase agreements, collateralized by GNMA Certificates on the following 100% owned properties:
Waters Edge				repaid		Interest payments and principal due at maturity		$	—			$	1,400
Monticello				repaid		Interest payments and principal due at maturity			—				4,500
The Ponds at Georgetown		5.34%		05/30/2007		Interest payments and principal due at maturity			4,800				6,925
								$	4,800			$	12,825

8. Transactions with Related Parties

Office Lease

During the three months ended March 31, 2007 and 2006, the Company incurred expenses of $19,000 and $42,000, respectively, to lease office space from The Burlington Capital Group, LLC, which is an affiliate of certain directors of the Company.

Mezzanine Loan

In September 2005, the Company loaned $7.4 million to America First Communities Offutt Developer, LLC (the “Developer”), which is an affiliate of certain directors of the Company. The funds were used by the Developer to partially finance the military housing privatization project at Offutt Air Force Base in Bellevue, Nebraska. On February 27, 2006, the Developer prepaid the loan. The Company received total proceeds of $7.4 million, including $7.1 million for repayment of the outstanding principal balance, $237,000 of accrued interest and an early termination fee of $89,000.

9. Equity Incentive Plan

The Company’s Equity Incentive Plan permits the award of equity based compensation, dividend equivalent rights (“DERs”), stock appreciation rights, restricted stock, restricted stock units and performance units. The Plan is administered by the Compensation Committee of the Board of Directors and allows for the aggregate issuance of the aforementioned awards for up to 750,000 shares of common stock. As of March 31, 2007, the Company had only granted stock options and DERs under the Plan. The exercise price of the options is determined based upon the closing stock price on the date of grant.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)

Stock option activity for the three months ended March 31, 2007 is summarized as follows:

		Number of				Weighted Average				Aggregate
		Shares				Exercise Price				Intrinsic Value
Balance at December 31, 2006			152,467			$	14.88			$	623,559
Granted			12,750				19.75				15,683
Balance at March 31, 2007			165,217			$	15.26			$	639,242
Options exercisable at March 31, 2007			67,805			$	13.13			$	231,686

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions for options granted in:

		2007				2006
Risk-free interest rate			4.51	%			4.55	%
Expected life		6 years				6 years
Volatility			15.8	%			12.7	%
Dividend yield			7.0	%			0.0	%
Estimated fair value		$	1.23			$	3.72

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The assumed expected life of the stock options is based upon the “simplified” method allowed by Securities and Exchange Commission Staff Accounting Bulletin No. 107. Volatility is based upon the historical volatility of the Company’s stock price. The dividend yield assumption is based upon management’s estimated yield during the expected life of the option, based upon historical experience. This assumption is 0% in 2006, as the 2006 options were also granted with DERs. The lack of DERs associated with the 2007 option grant accounts for the reduction in estimated fair value.

As of March 31, 2007, the outstanding options have a remaining average contractual life of 8.9 years. The average contractual life for the exercisable options at March 31, 2007 is 8.2 years.

Compensation expense, recognized on a straight-line basis, based upon the graded vesting schedule, for stock based compensation was $40,000 and $12,000 for the three months ended March 31, 2007 and 2006, respectively, and is primarily included within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company expects to recognize an additional $335,000 of compensation costs related to previously awarded stock option grants which will vest during the next 3.4 years.

10. Net Income Per Share

For the three months ended March 31, 2007 and 2006, the Company excluded all outstanding stock options in the computation of diluted loss from continuing operations and net income (loss) per share due to the antidilutive impact on loss from continuing operations.

11. Segment Reporting

The Company’s reportable segments consist of its multifamily apartment properties and its commercial property. Prior to their second quarter 2006 sale, the Company’s investment in agency securities comprised a third reportable segment.

The Company defines each of its multifamily apartment properties as an individual operating segment. It has determined that all multifamily apartment properties have similar economic characteristics and meet the other criteria which permit the multifamily apartment properties to be aggregated into one reportable segment, that being the acquiring, holding, operating and selling of multifamily apartment properties. Prior to the second quarter of 2006, the Company’s chief operating decision-maker assessed operating results based upon segment net income. Concurrent with the sale of the agency securities, the chief operating decision-maker began to assess operating performance of the remaining operating segments based upon net operating income. Net operating income, as defined by the Company, differs from net income in that it excludes depreciation, amortization, interest expense, and interest income from the determination of profit or loss. The Company has recast the segment results for the three months ended March 31, 2006 for the new basis of presentation.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)

The Company’s commercial property is defined as a separate individual operating segment. The Company’s chief operating decision-maker assesses and measures segment operating results based on net operating income at the commercial property level. Revenues for the three months ended March 31, 2007 and March 31, 2006 were $197,000 and $194,000, respectively. Net operating income was $140,000 and $139,000 for the respective periods. This property is currently held for sale and accordingly its revenues and net operating income are included within the income from discontinued operations line on the Company’s Condensed Consolidated Statement of Operations. Upon the divestiture of the property, the Company will have one reportable segment.

The Company does not derive any of its consolidated revenues from foreign countries and does not have any major tenants that individually account for 10% or more of the Company’s consolidated revenues.

The following table details certain key financial information for the Company’s multifamily reportable segment (in thousands):

		For the three				For the three
		months ended				months ended
		March 31, 2007				March 31, 2006
Total revenue:
Multifamily revenue		$	14,401			$	10,792
Other revenue			16				60
		$	14,417			$	10,852
Multifamily net operating income		$	8,119			$	6,152
General and administrative expenses			(1,524	)			(1,222	)
Property management expense			(376	)			(296	)
Interest expense			(3,501	)			(2,618	)
Depreciation expense			(3,382	)			(2,242	)
In-place lease amortization			(687	)			(269	)
Interest income, other income and expenses, net			157				454
Income (loss) from discontinued operations			104				213
Net income (loss)		$	(1,090	)		$	172

12. Contingencies

The Company’s interest rate swap and cap agreements create credit risk. Credit risk arises from the potential failure of counterparties to perform in accordance with the terms of their contracts. The Company’s risk management policies define parameters of acceptable market risk and limit exposure to credit risk. Credit exposure resulting from derivative financial instruments is represented by their fair value amounts, increased by an estimate of potential adverse position exposure arising from changes over time in interest rates, maturities and other relevant factors. The Company mitigates this risk by entering into derivative transactions only with counterparties with high credit ratings and does not anticipate nonperformance by any of its counterparties.

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are frequently covered by insurance. If it has been determined that a loss is probable to occur, the estimated amount of the loss is expensed in the financial statements. While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters known to it will not have a material adverse effect on the Company’s financial statements.

13. Recently Issued Accounting Pronouncements

The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN No. 48) effective January 1, 2007. FIN No. 48 clarifies the accounting for uncertainty in tax positions and requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The adoption of FIN No. 48 had no impact on the consolidated financial statements.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective in fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption of this statement will have on the consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected would be reported in earnings at each subsequent reporting date. The statement also establishes presentation and disclosure requirements in order to facilitate comparisons between entities choosing different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect existing accounting requirements for certain assets and liabilities to be carried at fair value. SFAS No. 159 is effective as of the beginning of a reporting entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the requirements of SFAS No. 159, and has not yet determined the impact on its consolidated financial statements.

14. Subsequent Event

On April 25, 2007, the Company signed a purchase and sale agreement to acquire the Johnson Housing Apartment Community, a 200-unit property located in Jacksonville, Florida for $14.7 million. The agreement is subject to customary closing conditions, including completion of due diligence by the Company.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

The Company’s primary business is the operation of multifamily apartment properties as long-term investments. Accordingly, the Company’s operating results will depend primarily on the net operating income generated by its multifamily apartment properties. This, in turn, will depend on the rental and occupancy rates of the properties and on the level of operating expenses. Occupancy rates and rents are directly affected by the supply of, and demand for, apartments in the market areas in which a property is located. Several factors influence this, including local and national economic conditions, the amount of new apartment construction, interest rates on single-family mortgage loans and the cost of home ownership. In addition, factors such as government regulation (such as zoning laws), inflation, real estate and other taxes, labor problems and natural disasters can affect the economic operations of a property.

The following table sets forth certain information regarding the Company’s real estate properties as of and for the three months ended March 31, 2007:

								Average				Number				Percentage
				Number				Square Feet				of Units				of Units
Property Name		Location		of Units				Per Unit				Occupied				Occupied
Arbor Hills		Antioch, TN			548				827				481				88	%
Arbors of Dublin		Dublin, OH			288				990				261				91	%
Bluff Ridge Apartments		Jacksonville, NC			108				873				107				99	%
Brentwood Oaks Apartments		Nashville, TN			262				852				239				91	%
Coral Point Apartments		Mesa, AZ			337				780				305				91	%
Cornerstone Apartments		Independence, MO			420				887				372				89	%
Covey at Fox Valley		Aurora, IL			216				948				208				96	%
Elliot’s Crossing Apartments		Tempe, AZ			247				717				202				82	%
Fox Hollow Apartments		High Point, NC			184				877				165				90	%
Greenbriar Apartments		Tulsa, OK			120				666				113				94	%
Highland Park Apartments		Columbus, OH			252				891				237				94	%
Huntsview Apartments		Greensboro, NC			240				875				229				95	%
Jackson Park Place Apartments		Fresno, CA			296				822				286				97	%
Jackson Park Place Apartments — Phase II		Fresno, CA			80				1,096				75				94	%
Lakes of Northdale Apartments		Tampa, FL			216				873				211				98	%
Littlestone of Village Green		Gallatin, TN			200				987				197				99	%
Misty Springs Apartments		Daytona Beach, FL			128				786				126				98	%
Monticello Apartments		Southfield, MI			106				1,027				99				93	%
Morganton Place		Fayetteville, NC			280				962				226				81	%
Oakhurst Apartments		Ocala, FL			214				790				210				98	%
Oakwell Farms Apartments		Nashville, TN			414				800				401				97	%
Shelby Heights		Bristol, TN			100				980				93				93	%
The Greenhouse		Omaha, NE			126				881				124				98	%
The Hunt Apartments		Oklahoma City, OK			216				693				198				92	%
The Park at Countryside		Port Orange, FL			120				720				113				94	%
The Ponds at Georgetown		Ann Arbor, MI			134				1,002				126				94	%
The Reserve at Wescott Plantation		Summerville, SC			192				1,083				177				92	%
Tregaron Oaks Apartments		Bellevue, NE			300				875				267				89	%
Village at Cliffdale		Fayetteville, NC			356				798				291				82	%
Waterman’s Crossing		Newport News, VA			260				944				247				95	%
Waters Edge Apartments (1)		Lake Villa, IL			108				814				101				94	%
Woodberry Apartments		Asheville, NC			168				837				163				97	%
					7,236				874				6,650				92	%
The Exchange at Palm Bay (1)		Palm Bay, FL			72,007	(2)			n/a				61,973				86	%

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Executive Summary

As property performance drives the overall financial results for the Company, it is important to examine a few key property performance measures. The following are high level performance measures management uses to gauge the overall performance of our property portfolio.

Physical occupancy and average quarterly same store rent per unit are performance measures that provide management an indication as to the quality of rental revenues. Physical occupancy is calculated simply as the percentage of units occupied out of the total units owned. The average quarterly same store rent per unit is calculated as the quarterly same store rental revenue divided by the number of units at same store properties (properties owned for the entirety of both periods presented).

Net operating income margin is calculated as the excess of rental revenues over real estate operating expenses as a percentage of rental revenues, and provides management an indication as to the ability of the properties to manage expenses in the current occupancy environment.

Additional information regarding physical occupancy, same store rental revenues and same store net operating income can be found on pages 16-18 of this report.

The following table presents these measures for the three months ended:

		March 31,				March 31,
		2007				2006
Physical occupancy			92	%			94	%
Average quarterly same store rent per unit		$	2,015			$	1,934
Net operating income margin			56.4	%			57.0	%

In the first quarter of 2007, the Company experienced a reduction in demand in certain markets, which decreased same store physical occupancy by 1% and the entire portfolio’s physical occupancy by 2%. The reduction in same store physical occupancy is primarily due to lower occupancy at Tregaron Oaks, located in a suburb of Omaha, Nebraska, and Elliot’s Crossing, located in Tempe, Arizona. The reduced occupancy at Tregaron Oaks is attributable to a downturn in market conditions and property management issues, which have been subsequently addressed by the Company. Demand at Elliot’s Crossing has decreased due to increased supply resulting from failed condominium conversions that have reverted to rental properties in close proximity to the property. The Company has also experienced lower than anticipated occupancy at Morganton Place and Village at Cliffdale, two properties acquired in September of 2006 that are in close proximity to Ft. Bragg, one of the largest army bases in the United States. The Company expects that occupancy will continue to be below expectations at these properties due to the January 2007 deployment of additional personnel to Iraq and the recently announced extension of active soldiers’ tours of duty overseas. When these properties were purchased, the Company negotiated a “revenue assurance” clause in the purchase and sale agreement. This provision allows the Company to recoup up to $600,000 of the purchase price of these properties if certain monthly revenue targets are not met during the first year of ownership. Although the receipt of these amounts is not recognized as rental revenues under generally accepted accounting principles, it does provide certainty as to cash collections at these properties. During the first quarter of 2007, the Company received $170,000 pursuant to this clause.

The Company is also continuing the execution of its strategic plan. In January 2007, it completed the sale of Cumberland Trace for $10.9 million and expects to sign a purchase and sale agreement to sell Waters Edge during the second quarter of fiscal 2007. The Company also determined that The Exchange at Palm Bay, the Company’s lone commercial property, does not fit with the rest of the Company’s portfolio, and accordingly is marketing the property for sale. The Company did not complete any acquisitions during the first quarter of 2007, however it is actively seeking to acquire properties in markets with positive growth potential, especially where it can achieve operational benefits through owning and managing several properties concentrated in the same market.

On April 2, 2007, the Company announced that it had retained an investment banker to assist it in exploring strategic alternatives to enhance shareholder value. There can be no assurance that the exploration of strategic alternatives will result in any new course of action and it does not intend to disclose developments with respect to the exploration of strategic alternatives unless and until the Board of Directors has approved a course of action.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Critical Accounting Policies

The Company’s critical accounting policies have not changed from those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Results of Operations

The following discussion of the Company’s results of operations for the three months ended March 31, 2007 should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of this report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Additionally, in accordance with Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, the Company has classified the results of operations of Cumberland Trace, The Exchange at Palm Bay, Waters Edge and the properties sold during 2006 and 2005 as discontinued operations for all periods presented. The property-specific components of net income that are classified as discontinued operations include rental revenue, real estate operating expenses, depreciation expense and interest expense on debt collateralized by these properties and any other property specific components of net income are not reflected in our results of continuing operations in any periods presented.

Three Months Ended March 31, 2007 Compared to the Three Months Ended March 31 2006 (in thousands):

		For the three				For the three
		months ended				months ended				Dollar				Percentage
		March 31, 2007				March 31, 2006				Change				Change
Revenues
Rental revenues		$	14,401			$	10,792			$	3,609				33	%
Other revenues			16				60				(44	)			(73	%)
Total revenues			14,417				10,852				3,565				33	%
Expenses
Real estate operating			6,282				4,640				1,642				35	%
Depreciation			3,382				2,242				1,140				51	%
General and administrative			1,524				1,222				302				25	%
Property management			376				296				80				27	%
In-place lease amortization			687				269				418				155	%
Intangible asset impairment			—				199				(199	)			—
Total expenses			12,251				8,868				3,383				38	%
Operating income		$	2,166			$	1,984			$	182				9	%

          Rental revenues. Rental revenues increased by $3.6 million from the first quarter of 2006. The Greenhouse, Arbors of Dublin, Jackson Park Place- Phase II, Morganton Place, Village at Cliffdale, Woodberry Apartments, and the Cornerstone Apartments (collectively, the “2006 acquisitions”) increased rental revenues by $3.2 million. Same store rental revenues increased approximately $440,000, or 4%, in spite of decreased physical occupancy. The reduction in same store physical occupancy was a result of significant decreases in occupancy at Elliot’s Crossing and Tregaron Oaks. Excluding Elliot’s Crossing and Tregaron Oaks Apartments, same store rental revenues increased approximately $550,000. Approximately $340,000 of the $440,000 overall increase in same store revenues is due to increased rental rates. The remaining increase is due to increased other rental revenues such as early termination fees and non-refundable deposits.

          Other revenues. Other revenues include fees earned from the management of properties owned by unrelated third parties. These revenues decreased during the three months ended March 31, 2007, as the Company is currently managing fewer properties than in 2006.

          Real estate operating expenses. Real estate operating expenses increased by approximately $1.6 million from the prior year first quarter. The 2006 acquisitions increased real estate operating expenses by approximately $1.3 million. Same store operating expenses increased by 7%, or approximately $340,000. This increase is primarily attributable to increased taxes partially attributable to a change in the tax law in Tennessee and increased bad debt expense. Also contributing to increased operating expenses are a greater number of landscaping projects initiated in the first quarter of 2007 and increased snow removal costs, due to a late season snowfall in the Midwest.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

          Depreciation expense. The six acquisitions completed during 2006, including four completed subsequent to March 31, 2006, increased depreciation expense by $1.0 million during the three months ended March 31, 2007 compared to the three months ended March 31, 2006. Same store depreciation expense increased by $105,000 due to capital expenditures during the past twelve months.

          General and administrative expenses. General and administrative expenses increased by $302,000 from the three months ended March 31, 2006. The increase is primarily attributable to a $195,000 increase in professional fees. During the first quarter of 2007, the Company incurred $353,000 of costs associated with its evaluation of strategic alternatives. While the Company did not incur costs associated with the evaluation of strategic alternatives in 2006, it did incur professional service and consulting fees of approximately $158,000 during the first quarter of 2006. These fees were paid to a consulting firm to assist the Board of Directors in the evaluation of the Company’s compensation programs and to a firm to provide financial advisory services. These 2006 costs did not recur during 2007. The remaining increase in general and administrative expenses relates to increased salary and personnel costs primarily the timing of hiring of additional personnel to replace the services formerly provided by the Company’s external advisor. These employees were hired in the first and second quarters of 2006, thereby creating increased salary and personnel costs of $70,000 in the three months ended March 31, 2007.

          Property management expenses. Property management expenses consist of salaries and benefits of the Company’s regional property managers, training personnel, national maintenance directors and senior vice-president of operations, their respective travel costs and other costs directly attributable to these personnel. Such costs increased by $80,000 from the prior year primarily due to the expansion of the Company’s training program and the hiring of an additional maintenance director.

          In-place lease amortization. In-place lease intangibles arise as a result of the allocation of a portion of the total acquisition cost of an acquired property to leases in existence as of the date of acquisition. The estimated valuation of in-place leases is calculated by applying a risk-adjusted discount rate to the projected cash flow realized at each property during the estimated lease-up period it would take to lease these properties. This allocated cost is amortized over the average remaining term of the leases. Amortization expense from in-place lease intangibles increased as the majority of the 2006 acquisitions occurred subsequent to the first quarter of 2006.

Other Income and Expenses

Other income and expenses during the first quarter of 2007 and 2006 consisted of the following (in thousands):

		For the three				For the three
		months ended				months ended				Dollar				Percentage
		March 31, 2007				March 31, 2006				Change				Change
Interest and dividend income		$	141			$	937			$	(796	)			(85	%)
Impairment of securities			—				(344	)			344				—
Interest expense			(3,501	)			(2,618	)			(883	)			34	%
Other expense, net		$	(3,360	)		$	(2,025	)		$	(1,335	)			66	%

Interest and dividend income decreased significantly from the three months ended March 31, 2006 due to the repayment of the Offutt mezzanine loan in the first quarter of 2006 and reduced restricted cash balances. During the first quarter of 2006, the Company earned $326,000 of interest income related to the Offutt mezzanine loan, which was repaid in February 2006. Additionally during the first quarter of 2006, the Company had significantly larger average balances of restricted cash. The restricted cash was generated from the 2005 sale of St. Andrews at Westwood ($29.4 million) and the placement of $16.9 million to serve as additional collateral for tax-exempt bonds issued to finance Coral Point Apartments and Covey at Fox Valley. Throughout 2006, this cash was utilized by the Company to partially finance the 2006 acquisitions. Interest income in 2006 was partially offset by the impairment and subsequent loss upon sale of the agency securities. In March 2006, the Company determined that it no longer intended to hold its agency securities for a period of time that would be sufficient to allow it to recover the unrealized losses which were recorded as a component of other comprehensive income, and on April 24, 2006, the portfolio of agency securities was sold.

Interest expense represents interest paid and other expenses associated with the taxable and tax-exempt mortgage debt incurred to finance the Company’s investments in multifamily apartment properties. Borrowings used to finance acquisitions, and the $10.0 million borrowed in January 2007 increased interest expense by $997,000 compared to the quarter ended March 31, 2006. The adjustment of the Company’s interest rate swaps to current market value increased interest expense by an additional $167,000. During the first quarter of 2006, the market value of the Company’s interest rate swaps increased, which in turn reduced interest expense by $75,000, whereas in the current year, the market valued decreased, which increased interest expense by $92,000. These increases were offset by reduced interest expense associated with the Company’s repurchase agreement borrowings. During the past twelve months, the Company has repaid $25.4 million of repurchase agreements, which has resulted in reduced interest expense of approximately $300,000.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Discontinued Operations.

During the first quarter of 2007, the Company completed the sale of Cumberland Trace. The Company is also pursuing the sales of Waters Edge and The Exchange at Palm Bay, and has designated these two properties as held for sale. Accordingly, the results of operations for the periods presented have been reclassified to discontinued operations and disclosed as a single line item on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

In addition to the aforementioned properties, the 2006 period also includes the Park at 58, Delta Crossing and the Belvedere Apartments as discontinued operations, as these properties were sold in later quarters during 2006.

Rental revenues, operating expenses, and other expenses all decreased from 2006 to 2007 due to the number of properties which comprised discontinued operations for each period. During 2007, there were three properties included within discontinued operations, while in 2006 there were six.

Funds from Operations (“FFO”)

The following sets forth a reconciliation of the Company’s net income (loss) as determined in accordance with GAAP and its FFO for the periods set forth (in thousands):

		For the three				For the three
		months ended				months ended
		March 31, 2007				March 31, 2006
Net income (loss)		$	(1,090	)		$	172
Depreciation			3,328				2,241
In-place lease amortization			687				269
Depreciation and amortization of discontinued operations			53				216
Impairment of securities			—				344
FFO		$	2,978			$	3,242
Shares outstanding			11,046				11,036
FFO per share		$	0.27			$	0.29

Funds from Operations decreased $264,000, or 8% for the three months ended March 31, 2007. The $1.96 million increase in the multifamily segment’s net operating income, resulting primarily from the 2006 acquisitions, was offset by a $796,000 reduction in interest income, a $883,000 increase in interest expense, a $109,000 reduction in income from discontinued operations, a $44,000 reduction in management fee income and a combined $382,000 increase in general and administrative and property management expenses. FFO does not include the $170,000 received pursuant to the revenue assurance clause, as these funds are not included in the computation of net income. The Company expects the performance of the properties acquired during 2006 will improve during the remainder of 2007, as the on-site personnel complete additional training and become more familiar with the Company’s methods and strategies. Accordingly, we expect these acquisitions to be increasingly accretive to FFO in future periods.

The Company generally calculates FFO in accordance with the definition of FFO that is recommended by the National Association of Real Estate Investment Trusts (“NAREIT”). To calculate FFO under the NAREIT definition, depreciation and amortization expenses related to the Company’s real estate, gains or losses realized from the disposition of depreciable real estate assets, and certain extraordinary items are added back or deducted from the Company’s net income (loss). In 2006, the Company added back the impairment loss recognized on the Company’s agency securities and believes that this treatment is appropriate since NAREIT allows for the exclusion of gains and losses recognized in connection with the sale of a security in the determination of FFO. NAREIT does not specifically discuss how an impairment of a security should be handled.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

The Company believes that FFO is an important non-GAAP measurement because FFO excludes the depreciation expense on real estate assets and real estate generally appreciates over time or maintains residual value to a much greater extent than other depreciable assets such as machinery or equipment. Additionally, other real estate companies, analysts and investors utilize FFO in analyzing the results of real estate companies. The Company’s FFO may not be comparable to other REITs or real estate companies with similar assets. This is due in part to the differences in capitalization policies used by different companies and the significant effect these capitalization policies have on FFO. Real estate costs incurred in connection with real estate operations which are accounted for as capital improvements are added to the carrying value of the property and depreciated over time whereas real estate costs that are expensed are accounted for as a current period expense. This affects FFO because costs that are accounted for as expenses reduce FFO. Conversely, real estate costs that are capitalized and depreciated are added back to net income to calculate FFO.

Although the Company considers FFO to be a useful measure of its operating performance, FFO should not be considered as an alternative to net income (loss) which is calculated in accordance with GAAP.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Supplemental Operating Performance Statistics

The following tables are presented to provide additional information regarding property performance.

Physical Occupancy

		For the three				For the three
		months ended				months ended
Property Name		March 31, 2007				March 31, 2006				Change
Properties historically owned by the Company
Arbor Hills			88	%			91	%			(3	%)
Bluff Ridge Apartments			99	%			99	%			—
Brentwood Oaks Apartments			91	%			97	%			(6	%)
Coral Point Apartments			91	%			95	%			(4	%)
Covey at Fox Valley			96	%			94	%			2	%
Elliot’s Crossing Apartments			82	%			94	%			(12	%)
Fox Hollow Apartments			90	%			86	%			4	%
Greenbriar Apartments			94	%			94	%			—
Highland Park Apartments			94	%			89	%			5	%
Huntsview Apartments			95	%			88	%			7	%
Jackson Park Place Apartments			97	%			93	%			4	%
Lakes of Northdale Apartments			98	%			98	%			—
Littlestone of Village Green			99	%			97	%			2	%
Misty Springs Apartments			98	%			100	%			(2	%)
Monticello Apartments			93	%			85	%			8	%
Oakhurst Apartments			98	%			99	%			(1	%)
Oakwell Farms Apartments			97	%			94	%			3	%
Shelby Heights			93	%			100	%			(7	%)
The Hunt Apartments			92	%			97	%			(5	%)
The Park at Countryside			94	%			99	%			(5	%)
The Ponds at Georgetown			94	%			83	%			11	%
The Reserve at Wescott Plantation			92	%			90	%			2	%
Tregaron Oaks Apartments			89	%			99	%			(10	%)
Waterman’s Crossing			95	%			98	%			(3	%)
			93	%			94	%			(1	%)
2006 Acquisitions
Cornerstone Apartments			89	%			—				89	%
Morganton Place			81	%			—				81	%
Village at Cliffdale			82	%			—				82	%
Woodberry Apartments			97	%			—				97	%
Jackson Park Place Apartments — Phase II			94	%			—				94	%
Arbors of Dublin (1)			91	%			92	%			(1	%)
The Greenhouse (1)			98	%			99	%			(1	%)
Properties held for sale or sold (2)
Belvedere Apartments			—				99	%			(99	%)
Delta Crossing			—				93	%			(93	%)
The Park at 58 Apartments			—				78	%			(78	%)
Waters Edge Apartments			94	%			89	%			5	%
			92	%			94	%			(2	%)

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Same Store Rental Revenue

		For the three				For the three
		months ended				months ended
Property Name		March 31, 2007				March 31, 2006				Change				% Change
Arbor Hills		$	960,208			$	907,391			$	52,817				6	%
Bluff Ridge Apartments			228,703				216,469				12,234				6	%
Brentwood Oaks Apartments			534,637				547,064				(12,427	)			(2	%)
Coral Point Apartments			613,554				580,937				32,617				6	%
Covey at Fox Valley			569,867				530,511				39,356				7	%
Elliot’s Crossing Apartments			438,682				463,245				(24,563	)			(5	%)
Fox Hollow Apartments			302,639				282,808				19,831				7	%
Greenbriar Apartments			183,382				176,686				6,696				4	%
Highland Park Apartments			402,264				391,091				11,173				3	%
Huntsview Apartments			431,603				391,774				39,829				10	%
Jackson Park Place Apartments			671,628				628,283				43,345				7	%
Lakes of Northdale Apartments			520,132				495,958				24,174				5	%
Littlestone of Village Green			398,081				365,940				32,141				9	%
Misty Springs Apartments			280,929				263,465				17,464				7	%
Monticello Apartments			266,765				253,510				13,255				5	%
Oakhurst Apartments			454,097				440,063				14,034				3	%
Oakwell Farms Apartments			768,232				693,244				74,988				11	%
Shelby Heights			183,919				177,370				6,549				4	%
The Hunt Apartments			309,593				328,562				(18,969	)			(6	%)
The Park at Countryside			254,402				249,312				5,090				2	%
The Ponds at Georgetown			379,316				336,871				42,445				13	%
The Reserve at Wescott Plantation			458,829				436,150				22,679				5	%
Tregaron Oaks Apartments			566,655				653,358				(86,703	)			(13	%)
Waterman’s Crossing			685,492				669,936				15,556				2	%
Concession Adjustment (1)			37,964				(16,057	)			54,021				—
Total		$	10,901,573			$	10,463,941			$	437,632				4	%

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Same Store Net Operating Income

		For the three				For the three
		months ended				months ended
Property Name		March 31, 2007				March 31, 2006				Change				% Change
Arbor Hills		$	509,809			$	483,034			$	26,775				6	%
Bluff Ridge Apartments			130,129				122,223				7,906				6	%
Brentwood Oaks Apartments			297,049				318,365				(21,316	)			(7	%)
Coral Point Apartments			333,468				307,141				26,327				9	%
Covey at Fox Valley			361,855				263,576				98,279				37	%
Elliot’s Crossing Apartments			231,409				276,037				(44,628	)			(16	%)
Fox Hollow Apartments			141,505				144,749				(3,244	)			(2	%)
Greenbriar Apartments			74,801				86,855				(12,054	)			(14	%)
Highland Park Apartments			185,317				206,721				(21,404	)			(10	%)
Huntsview Apartments			233,220				217,113				16,107				7	%
Jackson Park Place Apartments			402,326				369,684				32,642				9	%
Lakes of Northdale Apartments			310,339				316,533				(6,194	)			(2	%)
Littlestone of Village Green			237,410				204,294				33,116				16	%
Misty Springs Apartments			154,940				140,648				14,292				10	%
Monticello Apartments			110,353				120,016				(9,663	)			(8	%)
Oakhurst Apartments			287,982				277,622				10,360				4	%
Oakwell Farms Apartments			435,605				336,379				99,226				29	%
Shelby Heights			94,276				99,927				(5,651	)			(6	%)
The Hunt Apartments			173,110				218,847				(45,737	)			(21	%)
The Park at Countryside			115,213				126,243				(11,030	)			(9	%)
The Ponds at Georgetown			204,433				146,764				57,669				39	%
The Reserve at Wescott Plantation			236,202				256,170				(19,968	)			(8	%)
Tregaron Oaks Apartments			299,010				395,881				(96,871	)			(24	%)
Waterman’s Crossing			438,508				467,207				(28,699	)			(6	%)
Total		$	5,998,269			$	5,902,029			$	96,240				2	%

As denoted in the table above, net operating income improved significantly at Covey at Fox Valley, Oakwell Farms Apartments and The Ponds at Georgetown. Covey at Fox Valley’s net operating income improved due to increased revenue due to improved demand and to lower expenses due to the significant roof repair work performed in 2006. The improvements at Oakwell Farms Apartments and The Ponds at Georgetown are primarily due to increased revenue as a result of increased occupancy. Net operating income decreased at Elliot’s Crossing Apartments, Tregaron Oaks Apartments and The Park at Countryside due to increased vacancy. Net operating income decreased at The Hunt Apartments due to increased vacancy and state franchise tax costs. The Greenbriar Apartments were also negatively impacted by increased franchise taxes. Although occupancy and rental revenues increased at Highland Park, net operating income decreased due to increased bad debt expense and administrative costs.

Liquidity and Capital Resources

The Company’s primary source of cash is net rental revenues generated by its real estate investments. Net rental revenues from a multifamily apartment property depend on the rental and occupancy rates of the property. Occupancy rates and rents are directly affected by the supply of, and demand for, apartments in the market areas in which a property is located. This, in turn, is affected by several factors, such as local or national economic conditions, the amount of new apartment construction and the affordability of home ownership. In addition, factors such as government regulation (such as zoning laws), inflation, real estate and other taxes, labor problems and natural disasters can affect the economic operations of a property.

The Company uses cash primarily to (i) pay the operating expenses of its multifamily apartment properties, including the cost of capital improvements; (ii) pay the operating expenses of the Company’s administration; (iii) pay debt service on its bonds and mortgage notes payable; (iv) acquire additional multifamily apartments and other investments and (v) pay dividends. The Company expects to be able to fund 2007’s dividends from cash generated from operating activities.

The Company’s principal business strategy is to acquire and operate multifamily apartment properties as long-term investments. In order to achieve its acquisition strategy, the Company has the authority to finance the acquisition of additional real estate in a variety of manners, including raising additional equity capital. In June 2004, the Company filed a registration statement for $200 million of capital stock which may be sold from time to time in order to raise additional equity capital in order to support the Company’s business strategy. To date, no securities have been sold under this registration statement.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

In addition to the funds that the Company may raise through the issuance of additional equity capital, it may also be able to borrow money to finance the acquisition of additional real estate assets. Borrowing to acquire additional multifamily apartment properties is in the form of long-term taxable or tax exempt mortgage loans secured by the acquired properties. In the third quarter of 2006, the Company entered into a Master Credit Facility and Reimbursement Agreement (the “Facility”) with Wells Fargo Bank, N.A. and Fannie Mae. The Facility provides the Company the ability to borrow at either fixed or variable interest rates and also enables the Company to utilize Fannie Mae credit enhancement on tax exempt bond financings on its existing portfolio or for future property acquisitions. Upon closing of the Facility, the Company borrowed $37.6 million to finance the acquisition of Morganton Place, Village of Cliffdale, and Woodberry Apartments. In addition to these three properties, the Facility is also secured by first mortgages on The Greenhouse, Arbors of Dublin, Brentwood Oaks, Covey at Fox Valley, and Cornerstone Apartments. As of March 31, 2007, the Company had $73.1 million and $23.7 million in fixed and Fannie Mae credit enhanced variable rate borrowings, respectively, under the Facility. The Facility also provides the Company the ability, until September 28, 2007, to borrow an additional $11.6 million at a fixed interest rate of 5.68%. The Facility may also be expanded with the consent of the lenders.

The multifamily apartment properties which the Company currently owns are financed under 21 financings, including the Facility, with an aggregate principal balance of $250.5 million as of March 31, 2007. These financings consist of twelve tax-exempt bonds with an aggregate principal balance outstanding of approximately $111.7 million and nine taxable mortgage notes payable with a combined principal balance of approximately $138.8 million. After considering the impact of the Company’s interest rate swaps, approximately 82% of these mortgage obligations bear interest at a fixed rate with a weighted average interest rate of 5.15% per annum for the three months ended March 31, 2007. The remaining 18% of these mortgage obligations bear interest at variable rates that had a weighted average interest rate of 3.82% per annum, including the effect of interest rate swaps, for the three months ended March 31, 2007. Maturity dates on these mortgage obligations range from December 2007 to November 2044.

The amount of debt the Company can incur is not limited by its Articles of Incorporation or otherwise. In general, however, the amount of borrowing used to finance the overall multifamily apartment property portfolio is approximately 55% to 70% of the purchase price of these assets, although higher or lower levels of borrowings may be used on any single property.

Additionally, until January 2007, the Company had borrowings in the form of notes payable. The $2.4 million of notes payable, which were assumed as part of the merger with America First Real Estate Investment Partners, L.P. were redeemed for a price equal to 100% of the outstanding principal balance of the notes together with accrued interest. The notes were redeemed early, as the indenture required that 80% of the net proceeds from the sale of Delta Crossing be utilized to redeem the notes.

The Company also has borrowings in the form of repurchase agreements. As of March 31, 2007, the Company has one repurchase agreement with a balance of $4.8 million. The Company’s use of repurchase agreements has decreased as these financings were primarily utilized to finance investments in agency securities and mezzanine-level financings. As of March 31, 2007, the Company has no such investments.

In order to mitigate interest rate risk associated with the Company’s variable rate debt, the Company has entered into multiple derivative financial instruments. The following interest rate swap and cap contracts owned by the Company do not qualify for hedge accounting and thus are accounted for as free standing financial instruments which are marked to market each period through the statement of operations as a component of interest expense.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

As of March 31, 2007, notional amounts and terms are as follows (dollars in thousands):

		Interest Rate Swaps and Caps
				Notional				Receive/				Pay
		Maturity		Amount				Cap Rate				Rate
Fixed to Variable		September 20, 2007		$	5,300	(4)			7.13	%			4.24	%	(3)
Fixed to Variable		December 6, 2007		$	4,921	(1)(4)			7.75	%			4.24	%	(3)
Fixed to Variable		January 22, 2009		$	8,300	(4)			5.38	%			4.24	%	(3)
Fixed to Variable		July 13, 2009		$	6,930	(4)			7.25	%			4.24	%	(3)
Fixed to Variable		July 13, 2009		$	3,980	(4)			7.50	%			4.24	%	(3)
Variable to Fixed		February 3, 2009		$	8,100				3.59	%  (2)			2.82	%
Variable to Fixed		June 25, 2009		$	10,910				3.59	%  (2)			3.30	%
Interest Rate Cap		December 22, 2009		$	13,400				4.50	%			N/A
Interest Rate Cap		December 22, 2009		$	12,750				4.50	%			N/A
Interest Rate Cap		September 15, 2011		$	11,320				6.22	%			N/A

The $10.9 million variable to fixed rate swap was entered into on top of and to mitigate the variable rate risk of those fixed to variable rate swap maturing July 13, 2009. It effectively fixes the interest rate on $10.9 million of bonds payable at 3.30%, plus the 0.65% variable rate spread, through June 25, 2009.

The $8.1 million variable to fixed rate swap was entered into on top of and to mitigate the variable rate risk of the fixed to variable rate swap maturing January 22, 2009. It effectively fixes the interest rate on $8.1 million of bonds payable at 2.82%, plus the 0.65% variable rate spread, through February 3, 2009.

Additionally, the Company has two interest rate swaps which qualified, and have been designated, as cash flow hedges of changes in variable interest rates. The notional amounts and terms are as follows (dollars in thousands):

				Notional				Receive		Pay
		Maturity		Amount				Rate		Rate
Variable to Fixed		January 15, 2012		$	11,320			3.59%  (1)			3.44	%
Variable to Fixed		December 15, 2016		$	12,410			3.59%  (1)			3.69	%

Cash Flows from Operating, Investing and Financing Activities

Cash provided by operating activities for the three months ended March 31, 2007 decreased by $952,000 compared to the same period a year earlier. The decrease is primarily attributable to the payment of approximately $1.2 million of accounts payable and accrued expenses. The reduction in net income was offset by the increased depreciation expense and other assets.

For the three months ended March 31, 2007, investing activities provided $10.1 million of cash. This cash was generated principally from the January 2007 sale of Cumberland Trace for $10.7 million.

For the three months ended March 31, 2007, the Company used $12.5 million of cash in financing activities. During the quarter, the Company repaid $9.2 million of bonds and mortgage notes payable, $2.4 million of notes payable and $8.0 million of repurchase agreements payable. To finance the repayment of the notes payable and repurchase agreements payable, the Company borrowed an additional $10.0 million under the Facility.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Contractual Obligations

The Company had the following contractual obligations as of March 31, 2007 (in thousands):

		Payments due by period
						Less than				2-3				4-5				More than
		Total				1 year				years				years				5 years
Bonds and mortgage notes payable		$	250,483			$	6,525			$	13,591			$	18,017			$	212,350
Borrowings under repurchase agreements		$	4,800			$	4,800			$	—			$	—			$	—

The Company is also contractually obligated to pay interest on its long-term debt obligations. This interest is not included in the table above. The weighted average interest rate of the long-term debt obligations outstanding as of March 31, 2007 was approximately 5.15% for fixed-rate debt and 3.82% for variable-rate debt.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective in fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption of this statement will have on the consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected would be reported in earnings at each subsequent reporting date. The statement also establishes presentation and disclosure requirements in order to facilitate comparisons between entities choosing different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect existing accounting requirements for certain assets and liabilities to be carried at fair value. SFAS No. 159 is effective as of the beginning of a reporting entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the requirements of SFAS No. 159, and has not yet determined the impact on its consolidated financial statements.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company’s primary market risk exposure is interest rate risk. The Company’s exposure to market risk for changes in interest rates relates primarily to its long-term variable rate borrowings. Interest rate risk is highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond the Company’s control.

The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objective, the Company borrows primarily at fixed rates and also enters into derivative financial instruments, such as interest rate swaps, in order to manage and mitigate its variable interest rate risk. The Company has not entered into derivative instrument transactions for speculative purposes.

Refer to our Annual Report on Form 10-K for the year ended December 31, 2006 for detailed disclosure about quantitative and qualitative disclosures concerning market risk. Quantitative and qualitative disclosures about market risk have not materially changed since December 31, 2006.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective, providing them with material information relating to the Company as required to be disclosed in the reports the Company files or submits under the Exchange Act on a timely basis.

(b) Changes in internal controls over financial reporting. There were no changes in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

There are no material pending legal proceedings to which the Company is a party or to which any of its properties is subject.

Item 1a. Risk Factors.

Item 1A, “Risk Factors” of the Company’s 2006 Annual Report on Form 10-K includes a detailed discussion of the Company’s risk factors. There have been no changes to the Company’s risk factors discussed therein.

Item 6. Exhibits.

The following exhibits are filed as required by Item 6 of this report. Exhibit numbers refer to the paragraph numbers under Item 601 of Regulation S-K:

2.1 Agreement and Plan of Merger among the Company and America First Apartment Advisory Corporation and The Burlington Capital Group dated December 30, 2005 (incorporated herein by reference to the Current report on Form 8-K filed January 5, 2006).

2.2 Agreement and Plan of Merger, dated November 25, 2003, between the Company and America First Real Estate Investment Partners, L.P. and Amendment to Agreement and Plan of Merger, dated February 10, 2004 (incorporated by reference to Exhibit 2.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-4 (Commission File No. 333-111036) filed by the Company on February 25, 2004).

2.3 Agreement and Plan of Merger, dated June 18, 2002, between the Company and America First Apartment Investors, L.P. (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form S-4 (Commission File No. 333-90690) filed by the Company on June 18, 2002).

3.1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-4 (Commission File No. 333-90690) filed by the Company on June 18, 2002).

3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-4 (Commission File No. 333-90690) filed by Company on August 1, 2002).

4.1 Specimen of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-4 (Commission File No. 333-90690) filed by the Company on June 18, 2002).

10.1 Employment Agreement between the Company and John H. Cassidy (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed February 23, 2007).

10.2 Employment Agreement between the Company and James J. Egan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed February 23, 2007).

10.3 Employment Agreement between the Company and Paul L. Beldin (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed February 23, 2007).

31.1 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		AMERICA FIRST APARTMENT INVESTORS, INC.
Date: May 7, 2007		/s/ John H. Cassidy
		John H. Cassidy
		President and Chief Executive Officer