Edgar Filing: AMERICA FIRST APARTMENT INVESTORS INC

e10vq

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 June 30, 2007


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 (State or other jurisdiction of incorporation or organization)		47-0858301 (I.R.S. Employer Identification No.)


1004 Farnam Street, Suite 100 Omaha, Nebraska (Address of principal executive offices)		68102 (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 August 3, 2007, there were 11,046,683 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 June 30, 2007 and December 31, 2006			1
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2007 and 2006			2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006			3
Notes to 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			26
Item 4. Controls and Procedures			26

PART II — OTHER INFORMATION

Item 1. Legal Proceedings			27
Item 1A. Risk Factors			27
Item 4. Submission of Matters to a Vote of Security Holders			27
Item 6.Exhibits			28

SIGNATURES			29
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)


	June 30,			December 31,
	2007			2006
Assets
Cash and cash equivalents	$	4,821		$	5,724
Restricted cash		10,284			9,391
Real estate assets:
Land		41,657			41,657
Buildings and improvements		346,123			342,222

Total		387,780			383,879
Less: accumulated depreciation		(51,123	)		(44,418	)

Real estate assets, net		336,657			339,461
Assets of discontinued operations		7,114			17,811
Investments in corporate equity securities, at fair value		2,762			3,526
In-place lease intangibles, net of accumulated amortization of $8,420 and $7,105, respectively		616			1,931
Other assets		6,391			7,920

Total assets	$	368,645		$	385,764


Liabilities
Accounts payable and accrued expenses	$	12,471		$	11,332
Dividends payable		2,982			2,872
Notes payable		—			2,413
Bonds and mortgage notes payable		250,217			249,651
Borrowings under repurchase agreements		4,800			12,825

Total liabilities		270,470			279,093


Contingencies

Shareholders’ Equity
Common stock, $0.01 par value; 500,000,000 shares authorized, 11,046,683 and 11,045,558 issued and outstanding		110			110
Additional paid-in capital		110,521			110,421
Accumulated deficit		(12,939	)		(4,084	)
Accumulated other comprehensive income		483			224

Total shareholders’ equity		98,175			106,671

Total liabilities and shareholders’ equity	$	368,645		$	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			For the six			For the six
	months ended			months ended			months ended			months ended
	June 30, 2007			June 30, 2006			June 30, 2007			June 30, 2006
Revenues:
Rental revenues	$	14,732		$	11,581		$	29,133		$	22,373
Other revenues		15			70			31			130

Total revenues		14,747			11,651			29,164			22,503


Operating Expenses:
Real estate operating		6,375			5,170			12,657			9,810
Depreciation		3,431			2,457			6,814			4,699
General and administrative		2,667			1,266			4,192			2,488
Property management		373			318			749			614
In-place lease amortization		629			388			1,315			657
Intangible asset impairment		—			—			—			199

Total operating expenses		13,475			9,599			25,727			18,467


Operating income		1,272			2,052			3,437			4,036

Interest and dividend income		134			398			275			1,336
Loss on redemption of securities		(22	)		(53	)		(22	)		(53	)
Impairment of securities		—			(23	)		—			(367	)
Interest expense		(3,331	)		(2,543	)		(6,832	)		(5,161	)


Loss from continuing operations		(1,947	)		(169	)		(3,142	)		(209	)

Income from discontinued operations		180			227			284			438
Gain on sales of discontinued operations		—			17,246			—			17,246


Net income (loss)		(1,767	)		17,304			(2,858	)		17,475

Other comprehensive income (loss):
Unrealized holding losses on securities arising during the period		(51	)		(59	)		(56	)		(101	)
Reclassification adjustments for losses realized in net income (loss)		13			23			13			367
Unrealized gains on derivatives		436			71			302			172

		398			35			259			438

Comprehensive income (loss)	$	(1,369	)	$	17,339		$	(2,599	)	$	17,913


Earnings per share — basic and diluted:
Loss from continuing operations	$	(0.18	)	$	(0.01	)	$	(0.28	)	$	(0.02	)
Income from discontinued operations and gain on sales of discontinued operations		0.02			1.58			0.02			1.60

Net income (loss)	$	(0.16	)	$	1.57		$	(0.26	)	$	1.58


Dividends declared per share	$	0.27		$	0.25		$	0.52		$	0.50


Weighted average number of shares outstanding — basic and diluted		11,046			11,036			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 six			For the six
	months ended			months ended
	June 30, 2007			June 30, 2006
Operating activities:
Net income (loss)	$	(2,858	)	$	17,475
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		6,867			5,102
Gain on sales of discontinued operations		—			(17,246	)
Intangible asset impairment		—			199
Impairment of securities		—			367
Loss on redemption of securities		22			53
Change in fair value on interest rate swap agreements		36			(42	)
Amortization		1,399			735
Non-cash stock based compensation		75			18
Change in other assets		1,595			1,433
Change in accounts payable and accrued expenses		1,138			140

Net cash provided by operating activities		8,274			8,234

Investing activities:
Capital improvements and real estate acquisitions		(3,779	)		(33,957	)
Proceeds from sales of discontinued operations		10,705			27,506
Proceeds from redemption of corporate equity securities		698			—
Principal received on agency securities		—			18,030
Change in restricted cash		(893	)		11,304
Proceeds from principal repayment of mezzanine loan		—			7,094

Net cash provided by investing activities		6,731			29,977

Financing activities:
Proceeds from mortgage notes payable		10,000			—
Repayment of note payable borrowings		(2,413	)		—
Repayments of borrowings under repurchase agreements		(8,025	)		(22,425	)
Dividends and dividend equivalents paid		(5,887	)		(5,548	)
Debt financing costs paid		(175	)		—
Issuance of common stock		26			—
Principal payments on bonds and mortgage notes payable		(9,434	)		(7,535	)

Net cash used in financing activities		(15,908	)		(35,508	)


Change in cash and cash equivalents		(903	)		2,703
Cash and cash equivalents at beginning of year		5,724			4,743

Cash and cash equivalents at end of period	$	4,821		$	7,446


Supplemental disclosure of cash flow information:
Dividends declared but not paid	$	2,982		$	2,759

Cash paid for interest	$	7,025		$	5,538

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

JUNE 30, 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.

On June 22, 2007, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sentinel Omaha LLC (the “Acquirer”) and Sentinel White Plains LLC, a wholly-owned subsidiary of the Acquirer (the “Acquisition Sub”), under which the Company will merge with and into the Acquisition Sub with the Acquisition Sub continuing as the surviving entity and as a wholly-owned subsidiary of the Acquirer (the “Merger”). As a result of the Merger, each issued and outstanding share of the Company’s common stock will be canceled and converted into the right to receive a cash payment of $25.30 per share. Prior to the effective date of the Merger, the Company will be permitted to continue to pay regular quarterly dividends in the ordinary course of business consistent with past practice, at a rate not to exceed $0.27 per share per quarter and will be allowed to pay a final pro rata dividend for the interim period between the record date for the last quarterly dividend and the effective date of the Merger. The consummation of the Merger is subject to customary closing conditions, including the approval of the Merger by the Company’s shareholders. The Merger is not subject to a financing condition. The Merger Agreement contains termination rights for both the Company and the Acquirer. Upon termination of the Merger Agreement under certain circumstances, the Company may be obligated to pay the Acquirer a termination fee of $8.4 million. Upon termination of the Merger Agreement under certain circumstances by the Company, the Acquirer may be obligated to pay the Company $25 million in liquidated damages.

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 June 30, 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 second quarter of 2006, or the first or second quarters of 2007.

On April 25, 2007, the Company signed a purchase agreement to acquire the Johnson Housing Apartment Community, a 200-unit property located in Jacksonville, Florida. The agreement was subject to customary closing conditions, including completion of due diligence by the Company. After additional due diligence, the Company has decided not to pursue this acquisition.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(UNAUDITED)

3. Discontinued Operations

As of June 30, 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 has signed purchase and sale agreements to sell Exchange and Waters Edge for $8.1 million and $7.2 million, respectively. Both transactions are expected to close during the third quarter of 2007.

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 second quarter of 2006, the Company completed the divestitures of The Park at 58 Apartments and the Belvedere Apartments for proceeds of $27.5 million. In connection with these sales, the Company recognized a gain of $17.2 million. During the second half of 2006, the Company completed the divestiture of Delta Crossing recognizing a gain of approximately $2.0 million and proceeds of $7.4 million.

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


	For the three			For the three			For the six			For the six
	months ended			months ended			months ended			months ended
	June 30, 2007			June 30, 2006			June 30, 2007			June 30, 2006
Revenues	$	462		$	1,089		$	1,057		$	2,461
Operating expenses		(222	)		(781	)		(594	)		(1,804	)
Other expenses, net		(60	)		(81	)		(179	)		(219	)

Income from discontinued operations	$	180		$	227		$	284		$	438

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 Redemption of 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. The 2007 second quarter loss on redemption of securities is due to the redemption of one of the Company’s preferred stock investments.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(UNAUDITED)

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 six months ended June 30, 2006.

7. Borrowings under Repurchase Agreements

Borrowings under repurchase agreements as of June 30, 2007 and December 31, 2006 consisted of the following (in thousands):


	Interest	Maturity		Carrying Amount
Collateral	Rate	Date	Payment Schedule	June 30, 2007		December 31, 2006
Repurchase agreements, collateralized by GNMA Certificates of 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	5.29%	07/30/2007	Interest payments and principal due at maturity
					4,800		6,925

				$	4,800	$	12,825

On July 30, 2007, the Company renewed its outstanding repurchase agreement until August 29, 2007 at an interest rate of 5.29%.

8. Transactions with Related Parties

Office Lease

Rental expense, paid to lease office space from The Burlington Capital Group, L.L.C., an affiliate of certain directors of the Company, was $19,000 and $37,000 for the three and six month periods ended June 30, 2007 and $44,000 and $86,000 for the three and six month periods ended June 30, 2006.

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.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(UNAUDITED)

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 June 30, 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.

Stock option activity for the six months ended June 30, 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 June 30, 2007		165,217	$	15.26	$	639,242


Options exercisable at June 30, 2007		67,805	$	13.13	$	231,686

As of June 30, 2007, the outstanding options have a remaining average contractual life of 8.6 years. The average contractual life for the exercisable options at June 30, 2007 is 7.9 years.

For purposes of determining compensation expense associated with stock options awarded in 2006 and 2007, 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.

Compensation expense, recognized on a straight-line basis, based upon the graded vesting schedule, for stock based compensation was $36,000 and $75,000 for the three and six month periods ended June 30, 2007 and $6,000 and $12,400 for the three and six month periods ended June 30, 2006. Stock based compensation expense 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 $298,000 of compensation costs related to previously awarded stock option grants which will vest during the next 2.1 years.

10. Net Income (Loss) Per Share

For the three and six months ended June 30, 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.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(UNAUDITED)

11. Segment Reporting

The Company’s reportable segments consist of its multifamily apartment properties and its commercial property.

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. The Company’s chief operating decision-maker assesses operating results based upon segment 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’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 were $187,000 and $384,000 for the three and six month periods ended June 30, 2007 and $194,000 and $388,000 for the three and six month periods ended June 30, 2006, respectively. Net operating income was $116,000 and $256,000 for the respective 2007 periods and $137,000 and $276,000 for the respective 2006 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			For the six			For the six
	months ended			months ended			months ended			months ended
	June 30, 2007			June 30, 2006			June 30, 2007			June 30, 2006
Total revenue:
Multifamily revenue	$	14,732		$	11,581		$	29,133		$	22,373
Other revenue		15			70			31			130

	$	14,747		$	11,651		$	29,164		$	22,503

Multifamily net operating income	$	8,357		$	6,411		$	16,476		$	12,563
General and administrative expenses		(2,667	)		(1,266	)		(4,192	)		(2,488	)
Property management expense		(373	)		(318	)		(749	)		(614	)
Interest expense		(3,331	)		(2,543	)		(6,832	)		(5,161	)
Depreciation expense		(3,431	)		(2,457	)		(6,814	)		(4,699	)
In-place lease amortization		(629	)		(388	)		(1,315	)		(657	)
Interest income, other income and expenses, net		127			392			284			847
Income from discontinued operations		180			17,473			284			17,684

Net income (loss)	$	(1,767	)	$	17,304		$	(2,858	)	$	17,475

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.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(UNAUDITED)

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 consolidated 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.

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 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 June 30, 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		492		90	%
Arbors of Dublin	Dublin, OH		288		990		261		91	%
Bluff Ridge Apartments	Jacksonville, NC		108		873		106		98	%
Brentwood Oaks Apartments	Nashville, TN		262		852		253		97	%
Coral Point Apartments	Mesa, AZ		337		780		305		91	%
Cornerstone Apartments	Independence, MO		420		887		383		91	%
Covey at Fox Valley	Aurora, IL		216		948		206		95	%
Elliot’s Crossing Apartments	Tempe, AZ		247		717		231		94	%
Fox Hollow Apartments	High Point, NC		184		877		172		93	%
Greenbriar Apartments	Tulsa, OK		120		666		114		95	%
Highland Park Apartments	Columbus, OH		252		891		245		97	%
Huntsview Apartments	Greensboro, NC		240		875		224		93	%
Jackson Park Place Apartments	Fresno, CA		296		822		281		95	%
Jackson Park Place Apartments — Phase II	Fresno, CA		80		1,096		77		96	%
Lakes of Northdale Apartments	Tampa, FL		216		873		207		96	%
Littlestone of Village Green	Gallatin, TN		200		987		196		98	%
Misty Springs Apartments	Daytona Beach, FL		128		786		123		96	%
Monticello Apartments	Southfield, MI		106		1,027		98		92	%
Morganton Place	Fayetteville, NC		280		962		248		89	%
Oakhurst Apartments	Ocala, FL		214		790		209		98	%
Oakwell Farms Apartments	Nashville, TN		414		800		405		98	%
Shelby Heights	Bristol, TN		100		980		98		98	%
The Greenhouse	Omaha, NE		126		881		123		98	%
The Hunt Apartments	Oklahoma City, OK		216		693		205		95	%
The Park at Countryside	Port Orange, FL		120		720		112		93	%
The Ponds at Georgetown	Ann Arbor, MI		134		1,002		111		83	%
The Reserve at Wescott Plantation	Summerville, SC		192		1,083		183		95	%
Tregaron Oaks Apartments	Bellevue, NE		300		875		276		92	%
Village at Cliffdale	Fayetteville, NC		356		798		297		83	%
Waterman’s Crossing	Newport News, VA		260		944		255		98	%
Waters Edge Apartments ⁽¹⁾	Lake Villa, IL		108		814		104		96	%
Woodberry Apartments	Asheville, NC		168		837		161		96	%

			7,236		874		6,761		93	%


The Exchange at Palm Bay⁽¹⁾	Palm Bay, FL	72,007⁽²⁾			n/a		61,567		86	%


(1)		Property is held for sale as of June 30, 2007.

(2)		This is an office/warehouse facility. The figure represents square feet available for lease to tenants and percentage of square feet occupied.

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 the 2006 and 2007 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 18- 22 of this report.

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


	June 30,			June 30,
	2007			2006
Physical occupancy		93	%		95	%
Average quarterly same store rent per unit	$	1,913		$	1,838
Net operating income margin		57	%		55	%

In the first quarter of 2007, the Company experienced a reduction in demand in certain markets, which decreased same store physical occupancy to 94% and the entire portfolio’s physical occupancy to 92%. During the second quarter, demand at the Company’s same store properties increased, leading to same store physical occupancy of 95%, which is consistent with occupancy at December 31, 2006; however, it is 1% less than same store physical occupancy at June 30, 2006. Same store physical occupancy was negatively impacted by lower occupancy at Tregaron Oaks, located in a suburb of Omaha, Nebraska, the Ponds at Georgetown, located in Ann Arbor, Michigan and Coral Point, located in Mesa, Arizona. In spite of the reduction in same store physical occupancy, same store rental revenues increased due to increased rental rates and other rental revenues.

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 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 half of 2007, the Company received $350,000 pursuant to this clause. As of June 30, 2007, $145,000 of the $600,000 remains available to the Company if rental revenues continue to be below the targeted amounts.

Proposed merger

On June 22, 2007, the Company entered into a definitive merger agreement with Sentinel Omaha LLC and Sentinel White Plains LLC, affiliates of Sentinel Real Estate Corporation (“Sentinel”). Under the terms of the merger agreement, each share of the Company’s common stock will be cancelled and converted into the right to receive $25.30 per share in cash. The transaction is expected to close late in the third quarter of 2007, and is subject to customary closing conditions, including the approval of the merger by the Company’s shareholders.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Important Information

The Company has filed a preliminary proxy statement relating to the proposed merger with the Securities and Exchange Commission. Once finalized, a definitive proxy statement will be sent to stockholders of the Company seeking approvals related to the proposed merger. The proxy statement contains information about the Company, the proposed merger and related matters to be voted on at the special meeting. SHAREHOLDERS ARE URGED TO READ THE PROXY STATEMENT CAREFULLY AS IT WILL CONTAIN IMPORTANT INFORMATION THAT STOCKHOLDERS SHOULD CONSIDER BEFORE MAKING A DECISION ABOUT THE MERGER. The proxy statement and other materials filed by the Company with the SEC are available free of charge at the SEC’s website at www.sec.gov or from the Company by directing a request to America First Apartment Investors, Inc., 1004 Farnam Street, Suite 100, Omaha, Nebraska 68102, Attention: Investor Relations (telephone 800-239-8787).

The Company and its directors, executive officers and other employees may be deemed to be participating in the solicitation of proxies from the Company’s stockholders in connection with the approval of the proposed merger. Information about the Company’s directors and executive officers is available in the Company’s proxy statements and its Annual Reports on Form 10-K previously filed with the SEC. Additional information about the interests of potential participants is included in the preliminary proxy statement the Company filed with the SEC.

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 and six months ended June 30, 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 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.

Three Months Ended June 30, 2007 Compared to the Three Months Ended June 30, 2006 (in thousands):


	For the three		For the three
	months ended		months ended		Dollar			Percentage
	June 30, 2007		June 30, 2006		Change			Change
Revenues
Rental revenues	$	14,732	$	11,581	$	3,151			27	%
Other revenues		15		70		(55	)		(79	%)

Total revenues		14,747		11,651		3,096			27	%


Expenses
Real estate operating		6,375		5,170		1,205			23	%
Depreciation		3,431		2,457		974			40	%
General and administrative		2,667		1,266		1,401			111	%
Property management		373		318		55			17	%
In-place lease amortization		629		388		241			62	%

Total expenses		13,475		9,599		3,876			40	%


Operating income	$	1,272	$	2,052	$	(780	)		(38	%)

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Rental revenues. Rental revenues increased by $3.2 million from the second quarter of 2006. Jackson Park Place- Phase II, Morganton Place, Village at Cliffdale, Woodberry Apartments, and the Cornerstone Apartments (collectively, the “2006 acquisitions”) increased rental revenues by $2.6 million. The Greenhouse and Arbors of Dublin, acquired during the first quarter of 2006 contributed increased rental revenues of $74,000. Same store rental revenues increased approximately $480,000, or 4.1%, in spite of a 1% decrease in physical occupancy. Approximately $260,000 of the $480,000 overall increase in same store revenues was due to increased rental rates. The remaining increase was due to increased other rental revenues such as early termination fees, damage 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 June 30, 2007, as the Company is currently managing fewer properties than in 2006.

Real estate operating expenses. Real estate operating expenses increased by $1.2 million from the prior year second quarter. The 2006 acquisitions increased real estate operating expenses by $1.1 million. Same store operating expenses increased by 2%, or approximately $100,000. This increase is primarily attributable to increased bad debt expenses.

Depreciation expense. The 2006 acquisitions increased depreciation expense by $830,000 during the three months ended June 30, 2007 compared to the three months ended June 30, 2006. Same store depreciation expense increased by $140,000 due to capital expenditures made at these properties during the past twelve months.

General and administrative expenses. General and administrative expenses increased by $1.4 million from the three months ended June 30, 2006. This increase is a result of costs associated with the Company’s evaluation of strategic alternatives. During the second quarter, the Company incurred $1.6 million of such costs. These costs primarily relate to fees paid to the Company’s financial and legal advisors. While the Company did not incur costs associated with the evaluation of strategic alternatives in 2006, it did incur professional services fees of approximately $150,000 during the second quarter of 2006. These fees were paid to a financial advisory firm engaged by the Board of Directors. These 2006 costs did not recur during 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 cost increased by $55,000 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 2006 acquisitions occurred subsequent to the second quarter of 2006.

Other Income and Expenses

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


	For the three			For the three
	months ended			months ended			Dollar			Percentage
	June 30, 2007			June 30, 2006			Change			Change
Interest and dividend income	$	134		$	398		$	(264	)		(66	%)
Loss on redemption of securities		(22	)		(53	)		31			(58	%)
Impairment of securities		—			(23	)		23			—
Interest expense		(3,331	)		(2,543	)		(788	)		31	%

Other expense, net	$	(3,219	)	$	(2,221	)	$	(998	)		45	%

Interest and dividend income decreased significantly from the three months ended June 30, 2006 due to reduced restricted cash balances. During the second quarter of 2006, the Company had significantly larger average balances of restricted cash. The restricted cash was generated from the sale of Belvedere Apartments ($17.6 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 the remainder of 2006, this cash was utilized by the Company to partially finance multifamily property acquisitions.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

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 under the Company’s Master Credit Facility and Reimbursement Agreement with Wells Fargo Bank, N.A. and Fannie Mae (the “Facility”), increased interest expense by approximately $1.1 million compared to the quarter ended June 30, 2006. Changes to the market value of the Company’s interest rate swaps resulted in a decrease in interest expense of $89,000 during the second quarter of 2007 compared to the second quarter of 2006. During the second quarter of 2006, the market value of the Company’s interest rate swaps decreased, which increased interest expense by $33,000, whereas in the current year, the market value of these swaps increased, which decreased interest expense by $56,000. Interest expense associated with notes payable and repurchase agreement borrowings also decreased compared to the second quarter of 2006. Since January 1, 2006, the Company has repaid $31.4 million of repurchase agreements and $2.4 million of notes payable, which reduced second quarter interest expense by approximately $200,000.

Six Months Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006 (in thousands):


	For the six		For the six
	months ended		months ended		Dollar			Percentage
	June 30, 2007		June 30, 2006		Change			Change
Revenues
Rental revenues	$	29,133	$	22,373	$	6,760			30	%
Other revenues		31		130		(99	)		(76	%)

Total Revenues		29,164		22,503		6,661			30	%


Expenses
Real estate operating		12,657		9,810		2,847			29	%
Depreciation		6,814		4,699		2,115			45	%
General and administrative		4,192		2,488		1,704			68	%
Property management		749		614		135			22	%
In-place lease amortization		1,315		657		658			100	%
Intangible asset impairment		—		199		(199	)		—

		25,727		18,467		7,260			39	%


Operating income	$	3,437	$	4,036	$	(599	)		(15	%)

Rental revenues. Rental revenues increased by $6.8 million during the six months ended June 30, 2007 from the six months ended June 30, 2006. The Greenhouse, Arbors of Dublin and the 2006 acquisitions increased rental revenues by $5.8 million. Same store rental revenues increased approximately $920,000, or 4%, in spite of a 1% decrease in same store physical occupancy. Approximately $560,000 of the $920,000 overall increase in same store revenues is due to increased rental rates. The remaining increase is due to increases in other rental revenues such as early termination fees, damage 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 six months ended June 30, 2007, as the Company is currently managing fewer properties than in 2006.

Real estate operating expenses. Real estate operating expenses increased by $2.8 million from the six months ended June 30, 2006. The Greenhouse, Arbors of Dublin and the 2006 acquisitions increased real estate operating expenses by $2.4 million. Same store operating expenses increased by 4%, or approximately $400,000. This increase is primarily attributable to increased taxes due to a change in the tax law in Tennessee and increased bad debt expense.

Depreciation expense. The Greenhouse, Arbors of Dublin and the 2006 acquisitions increased depreciation expense by $1.9 million during the six months ended June 30, 2007 compared to the six months ended June 30, 2006. Same store depreciation expense increased by $250,000 due to capital expenditures made at these properties during the past twelve months.

General and administrative expenses. General and administrative expenses increased by $1.7 million from the six months ended June 30, 2006. In the six months ended June 30, 2007, the Company incurred $2.0 million of costs associated with its evaluation of strategic alternatives. These costs primarily relate to fees paid to the Company’s financial and legal advisors. 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 $310,000 during the six months ended June 30, 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. Other general and administrative costs remained consistent with the prior period.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

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 cost increased by $135,000 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 second quarter of 2006.

Other Income and Expenses

Other income and expenses during the six month period ended June 30, 2007 and 2006 consisted of the following (in thousands):


	For the six			For the six
	months ended			months ended			Dollar			Percentage
	June 30, 2007			June 30, 2006			Change			Change
Interest and dividend income	$	275		$	1,336		$	(1,061	)		(79	%)
Loss on redemption of securities		(22	)		(53	)		31			(58	%)
Impairment of securities		—			(367	)		367			—
Interest expense		(6,832	)		(5,161	)		(1,671	)		32	%

Other expense, net	$	(6,579	)	$	(4,245	)	$	(2,334	)		55	%

Interest and dividend income decreased significantly from the six months ended June 30, 2006 due to the repayment of the Offutt mezzanine loan in the first quarter of 2006 and reduced restricted cash balances. In 2006, the Company earned $326,000 of interest income related to the Offutt mezzanine loan, which was repaid in February of that year. Additionally, during the first half 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), the sale of Belvedere Apartments ($17.6 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 multifamily property 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. The 2007 second quarter loss on redemption of securities is due to the redemption of one of the Company’s preferred stock investments.

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 under the Facility increased interest expense by $2.1 million compared to the six months ended June 30, 2006. Changes to the market value of the Company’s interest rate swaps to current market value resulted in an increase in interest expense of $78,000 during the six months ended June 30, 2007 compared to the same 2006 period. During the six months ended June 30, 2006, the market value of the Company’s interest rate swaps increased, which reduced interest expense by $42,000, whereas in the current year, the market value of these swaps decreased, which increased interest expense by $36,000. These increases were offset by reduced interest expense associated with its notes payable and repurchase agreement borrowings. Since January 1, 2006, the Company has repaid $31.4 million of repurchase agreements and $2.4 million of notes payable, which has resulted in reduced interest expense of approximately $520,000 from the six months ended June 30, 2006.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Discontinued Operations.

In January 2007, the Company completed the sale of Cumberland Trace. The Company has also signed purchase and sale agreements to divest Waters Edge Apartments and The Exchange at Palm Bay. 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 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 properties.

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, except per share amounts):


	For the three			For the three			For the six			For the six
	months ended			months ended			months ended			months ended
	June 30, 2007			June 30, 2006			June 30, 2007			June 30, 2006
Net income (loss)	$	(1,767	)	$	17,304		$	(2,858	)	$	17,475
Depreciation		3,377			2,414			6,705			4,610
In-place lease amortization		629			388			1,315			657
Depreciation and amortization of discontinued operations		—			143			53			402
Loss on redemption of securities		22			53			22			53
Impairment of securities		—			23			—			367
Less: Gain on sales of discontinued operations		—			(17,246	)		—			(17,246	)


FFO	$	2,261		$	3,079		$	5,237		$	6,318


Shares outstanding		11,046			11,036			11,046			11,036


FFO per share	$	0.20		$	0.28		$	0.47		$	0.57

Funds from Operations decreased $818,000, or 27% for the three months ended June 30, 2007. Costs associated with the Company’s evaluation of strategic alternatives reduced FFO by approximately $1.6 million. FFO was positively impacted by $400,000 from the 2006 acquisitions and by approximately $380,000 by improved same store net operating income.

FFO for the six months ended June 30, 2007 decreased by $1.1 million, or 17% from the six months ended June 30, 2006. Costs associated with the evaluation of strategic alternatives reduced FFO by $2.0 million. A decline in interest income reduced FFO by an additional $1.1 million. The 2006 acquisitions and improvements in same store net operating income positively impacted FFO by $1.3 million, and $520,000, respectively.

FFO does not include the $180,000 and $350,000 received by the Company pursuant to the revenue assurance clause negotiated in the acquisitions of Morganton Place and Village at Cliffdale during the three and six months ended June 30, 2007, as these funds are not included in the computation of net income.

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 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 multifamily property performance.

Physical Occupancy


	For the three			For the three			For the six			For the six
	months ended			months ended			months ended			months ended
Property Name	June 30, 2007			June 30, 2006			June 30, 2007			June 30, 2006
Properties historically owned by the Company

Arbor Hills		90	%		93	%		89	%		92	%
Bluff Ridge Apartments		98	%		98	%		99	%		98	%
Brentwood Oaks Apartments		97	%		97	%		94	%		97	%
Coral Point Apartments		91	%		96	%		90	%		95	%
Covey at Fox Valley		95	%		95	%		96	%		95	%
Elliot’s Crossing Apartments		94	%		97	%		88	%		95	%
Fox Hollow Apartments		93	%		84	%		92	%		85	%
Greenbriar Apartments		95	%		95	%		95	%		95	%
Highland Park Apartments		97	%		94	%		96	%		92	%
Huntsview Apartments		93	%		90	%		95	%		89	%
Jackson Park Place Apartments		95	%		96	%		96	%		94	%
Lakes of Northdale Apartments		96	%		99	%		97	%		99	%
Littlestone of Village Green		98	%		98	%		98	%		97	%
Misty Springs Apartments		96	%		100	%		97	%		100	%
Monticello Apartments		92	%		87	%		93	%		86	%
Oakhurst Apartments		98	%		99	%		98	%		99	%
Oakwell Farms Apartments		98	%		95	%		97	%		94	%
Shelby Heights		98	%		100	%		96	%		100	%
The Hunt Apartments		95	%		99	%		93	%		98	%
The Park at Countryside		93	%		99	%		93	%		99	%
The Ponds at Georgetown		83	%		93	%		88	%		88	%
The Reserve at Wescott Plantation		95	%		97	%		94	%		93	%
Tregaron Oaks Apartments		92	%		97	%		91	%		98	%
Waterman’s Crossing		98	%		99	%		97	%		98	%

		95	%		96	%		94	%		95	%

Fiscal 2006 Acquisitions⁽¹⁾
Cornerstone Apartments		91	%		—			90	%		—
Morganton Place		89	%		—			85	%		—
Village at Cliffdale		83	%		—			83	%		—
Woodberry Apartments		96	%		—			97	%		—
Jackson Park Place Apartments -		96	%		—			95	%		—
Phase II Arbors of Dublin		91	%		91	%		91	%		91	%
The Greenhouse		98	%		99	%		98	%		99	%

Properties held for sale
Delta Crossing		—			91	%		—			92	%
Waters Edge Apartments		96	%		93	%		95	%		91	%

		93	%		95	%		93	%		95	%


(1)		Arbors of Dublin and The Greenhouse were acquired by the Company during the first quarter of 2006, while the remaining properties were acquired in the third and fourth quarters of 2006.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES


Rental Revenues ⁽¹⁾	For the three		For the three
Full Year Same Store Properties	months ended		months ended
Property Name	June 30, 2007		June 30, 2006		Change			% Change
Arbor Hills	$	983,259	$	927,795	$	55,464			6	%
Bluff Ridge Apartments		229,825		222,457		7,368			3	%
Brentwood Oaks Apartments		583,109		543,331		39,778			7	%
Coral Point Apartments		642,826		592,880		49,946			8	%
Covey at Fox Valley		597,549		551,848		45,701			8	%
Elliot’s Crossing Apartments		460,766		482,081		(21,315	)		(4	%)
Fox Hollow Apartments		323,017		277,412		45,605			16	%
Greenbriar Apartments		183,719		181,094		2,625			1	%
Highland Park Apartments		423,117		411,530		11,587			3	%
Huntsview Apartments		424,964		389,614		35,350			9	%
Jackson Park Place Apartments		693,755		654,624		39,131			6	%
Lakes of Northdale Apartments		510,274		504,453		5,821			1	%
Littlestone of Village Green		409,318		373,443		35,875			10	%
Misty Springs Apartments		280,305		268,959		11,346			4	%
Monticello Apartments		262,692		252,785		9,907			4	%
Oakhurst Apartments		454,139		438,912		15,227			3	%
Oakwell Farms Apartments		793,959		717,567		76,392			11	%
Shelby Heights		184,955		179,735		5,220			3	%
The Hunt Apartments		326,511		339,837		(13,326	)		(4	%)
The Park at Countryside		249,652		252,175		(2,523	)		(1	%)
The Ponds at Georgetown		331,640		361,302		(29,662	)		(8	%)
The Reserve at Wescott Plantation		476,083		465,074		11,009			2	%
Tregaron Oaks Apartments		589,264		631,130		(41,866	)		(7	%)
Waterman’s Crossing		726,867		684,065		42,802			6	%

Total	$	11,141,565	$	10,704,103	$	437,462		$	4	%


(1)		Amounts disclosed are prior to the impact of deferring one-time concessions over the life of the respective leases.

The significant variances in rental revenues at the Fox Hollow Apartments, The Ponds at Georgetown and Tregaron Oaks Apartments are attributable to changes in physical occupancy. The increases at Littlestone of Village Green and Oakwell Farms Apartments are primarily attributable to increased rental rates.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES


Rental Revenues ⁽¹⁾	For the six		For the six
Full Year Same Store Properties	months ended		months ended
Property Name	June 30, 2007		June 30, 2006		Change			% Change
Arbor Hills	$	1,943,468	$	1,835,186	$	108,282			6	%
Bluff Ridge Apartments		458,527		438,927		19,600			4	%
Brentwood Oaks Apartments		1,117,746		1,090,395		27,351			3	%
Coral Point Apartments		1,256,380		1,173,817		82,563			7	%
Covey at Fox Valley		1,167,416		1,082,359		85,057			8	%
Elliot’s Crossing Apartments		899,449		945,326		(45,877	)		(5	%)
Fox Hollow Apartments		625,656		560,221		65,435			12	%
Greenbriar Apartments		367,101		357,780		9,321			3	%
Highland Park Apartments		825,382		802,621		22,761			3	%
Huntsview Apartments		856,567		781,388		75,179			10	%
Jackson Park Place Apartments		1,365,382		1,282,907		82,475			6	%
Lakes of Northdale Apartments		1,030,406		1,000,410		29,996			3	%
Littlestone of Village Green		807,399		739,382		68,017			9	%
Misty Springs Apartments		561,233		532,424		28,809			5	%
Monticello Apartments		529,457		506,295		23,162			5	%
Oakhurst Apartments		908,235		878,975		29,260			3	%
Oakwell Farms Apartments		1,562,191		1,410,810		151,381			11	%
Shelby Heights		368,874		357,105		11,769			3	%
The Hunt Apartments		636,104		668,399		(32,295	)		(5	%)
The Park at Countryside		504,054		501,487		2,567			1	%
The Ponds at Georgetown		710,955		698,173		12,782			2	%
The Reserve at Wescott Plantation		934,911		901,224		33,687			4	%
Tregaron Oaks Apartments		1,155,919		1,284,488		(128,569	)		(10	%)
Waterman’s Crossing		1,412,359		1,354,001		58,358			4	%

Total	$	22,005,171	$	21,184,100	$	821,071			4	%


(1)		Amounts disclosed are prior to the impact of deferring one-time concessions over the life of the respective leases.

The significant variances in rental revenues at the Fox Hollow Apartments, Huntsview Apartments and Tregaron Oaks Apartments are attributable to changes in physical occupancy. The increases at Littlestone of Village Green and Oakwell Farms Apartments are primarily attributable to increased rental rates.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES


Net Operating Income ⁽¹⁾	For the three		For the three
Full Year Same Store Properties	months ended		months ended
Property Name	June 30, 2007		June 30, 2006		Change			% Change
Arbor Hills	$	507,320	$	419,097	$	88,223			21	%
Bluff Ridge Apartments		134,214		129,874		4,340			3	%
Brentwood Oaks Apartments		347,821		322,957		24,864			8	%
Coral Point Apartments		375,955		331,895		44,060			13	%
Covey at Fox Valley		368,203		291,798		76,405			26	%
Elliot’s Crossing Apartments		258,025		276,528		(18,503	)		(7	%)
Fox Hollow Apartments		170,320		139,171		31,149			22	%
Greenbriar Apartments		93,972		85,289		8,683			10	%
Highland Park Apartments		206,327		225,420		(19,093	)		(8	%)
Huntsview Apartments		234,254		189,731		44,523			23	%
Jackson Park Place Apartments		411,422		382,760		28,662			7	%
Lakes of Northdale Apartments		307,239		312,395		(5,156	)		(2	%)
Littlestone of Village Green		230,996		203,274		27,722			14	%
Misty Springs Apartments		161,770		156,066		5,704			4	%
Monticello Apartments		136,662		106,772		29,890			28	%
Oakhurst Apartments		295,355		270,369		24,986			9	%
Oakwell Farms Apartments		435,097		371,669		63,428			17	%
Shelby Heights		106,836		76,649		30,187			39	%
The Hunt Apartments		206,041		215,145		(9,104	)		(4	%)
The Park at Countryside		133,251		143,867		(10,616	)		(7	%)
The Ponds at Georgetown		138,879		161,518		(22,639	)		(14	%)
The Reserve at Wescott Plantation		249,303		250,479		(1,176	)		(0	%)
Tregaron Oaks Apartments		304,011		370,722		(66,711	)		(18	%)
Waterman’s Crossing		480,454		468,490		11,964			3	%

Total	$	6,293,727	$	5,901,935	$	391,792			7	%


(1)		Amounts disclosed are prior to the impact of deferring one-time concessions over the life of the respective leases and costs associated with the accrual of vacation benefits and earned but unpaid salaries. Such amounts are not allocated to specific properties.

Net operating income increased at Arbor Hills due to a non-recurring 2006 insurance claim and an increase in other rental revenue. Covey at Fox Valley benefited from increased rental rates and lower real estate taxes, from a successful valuation reduction. Huntsview Apartments, Fox Hollow Apartments, Oakwell Apartments and Monticello Apartments all benefited from increased occupancy and rental rates. Additionally, Monticello Apartments was also able to benefit from reduced variable expenses. Shelby Heights’ net operating income increased due to non-recurring 2006 exterior repair projects. Net operating income decreased at The Ponds at Georgetown and Tregaron Oaks Apartments due to reduced occupancy, and in Tregaron’s case, increased repair and maintenance expenses.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES


Net Operating Income ⁽¹⁾	For the six		For the six
Full Year Same Store Properties	months ended		months ended
Property Name	June 30, 2007		June 30, 2006		Change			% Change
Arbor Hills	$	1,016,969	$	902,131	$	114,838			13	%
Bluff Ridge Apartments		264,343		252,098		12,245			5	%
Brentwood Oaks Apartments		644,676		641,322		3,354			1	%
Coral Point Apartments		709,422		639,036		70,386			11	%
Covey at Fox Valley		730,058		555,375		174,683			31	%
Elliot’s Crossing Apartments		489,434		552,565		(63,131	)		(11	%)
Fox Hollow Apartments		311,824		283,920		27,904			10	%
Greenbriar Apartments		168,773		172,144		(3,371	)		(2	%)
Highland Park Apartments		391,644		432,141		(40,497	)		(9	%)
Huntsview Apartments		467,474		406,844		60,630			15	%
Jackson Park Place Apartments		813,748		752,444		61,304			8	%
Lakes of Northdale Apartments		617,579		628,928		(11,349	)		(2	%)
Littlestone of Village Green		468,106		407,567		60,539			15	%
Misty Springs Apartments		316,710		296,714		19,996			7	%
Monticello Apartments		247,015		226,788		20,227			9	%
Oakhurst Apartments		599,362		547,991		51,371			9	%
Oakwell Farms Apartments		854,652		708,048		146,604			21	%
Shelby Heights		201,112		176,577		24,535			14	%
The Hunt Apartments		379,150		433,991		(54,841	)		(13	%)
The Park at Countryside		248,463		270,110		(21,647	)		(8	%)
The Ponds at Georgetown		343,312		308,283		35,029			11	%
The Reserve at Wescott Plantation		485,505		506,649		(21,144	)		(4	%)
Tregaron Oaks Apartments		603,021		766,603		(163,582	)		(21	%)
Waterman’s Crossing		918,962		935,697		(16,735	)		(2	%)

Total	$	12,291,314	$	11,803,966	$	487,348			4	%


(1)		Amounts disclosed are prior to the impact of deferring one-time concessions over the life of the respective leases and costs associated with the accrual of vacation benefits and earned but unpaid salaries. Such amounts are not allocated to specific properties.

Arbor Hills’ net operating income increased due to a non-recurring 2006 insurance claim and an increase in other rental revenue. Covey at Fox Valley’s net operating income improved due to increased revenue due to improved rental rates and lower expenses due to reduced real estate taxes, from a successful valuation reduction, and the non-recurrence of an insurance claim in 2006. Net operating income at Littlestone of Village Green, Huntsview Apartments and Oakwell Farms Apartments increased primarily due to increased physical occupancy and rental rates. Shelby Heights’ net operating income increased due to non-recurring 2006 exterior repair projects and slightly increased revenues. Net operating income decreased at The Hunt Apartments and Tregaron Oaks Apartments due to decreased occupancy, and in Tregaron’s case increased repair and maintenance expenses.

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.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

To finance the acquisition of additional real estate assets, the Company may raise funds through the issuance of additional equity capital or though the use 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 with Wells Fargo Bank, N.A. and Fannie Mae (the “Facility”). 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 at 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 June 30, 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 $250.2 million as of June 30, 2007. These financings consist of twelve tax-exempt bonds with an aggregate principal balance outstanding of approximately $111.6 million and nine taxable mortgage notes payable with a combined principal balance of approximately $138.6 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 six months ended June 30, 2007. The remaining 18% of these mortgage obligations bear interest at variable rates that had a weighted average interest rate of 3.96% per annum, including the effect of interest rate swaps, for the six months ended June 30, 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 June 30, 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 June 30, 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 June 30, 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	%		4.42	%⁽³⁾
Fixed to Variable	December 6, 2007	$	4,921	^{(1) (4)}		7.75	%		4.42	%⁽³⁾
Fixed to Variable	January 22, 2009	$	8,300	⁽⁴⁾		5.38	%		4.42	%⁽³⁾
Fixed to Variable	July 13, 2009	$	6,930	⁽⁴⁾		7.25	%		4.42	%⁽³⁾
Fixed to Variable	July 13, 2009	$	3,980	⁽⁴⁾		7.50	%		4.42	%⁽³⁾
Variable to Fixed	February 3, 2009	$	8,100			3.77	%⁽²⁾		2.82	%
Variable to Fixed	June 25, 2009	$	10,910			3.77	%⁽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


(1)		Notional amount is tied to The Exchange at Palm Bay bond payable and adjusts downward as principal payments are made on the bond payable.

(2)		Weighted average Bond Market Association rate for the quarter ended June 30, 2007.

(3)		Weighted average Bond Market Association rate for the quarter ended June 30, 2007 plus 0.65%.

(4)		These are total return swaps.

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		3.77	%⁽¹⁾		3.44	%
Variable to Fixed	December 15, 2016	$	12,410		3.77	%⁽¹⁾		3.69	%


⁽¹⁾		Weighted average Bond Market Association rate for the quarter ended June 30, 2007.

Cash Flows from Operating, Investing and Financing Activities

Cash provided by operating activities for the six months ended June 30, 2007 increased slightly compared to the same period a year earlier, as the decline in cash generated from operations was offset by increased accounts payable and accrued expenses.

For the six months ended June 30, 2007, investing activities provided $6.7 million of cash. This cash was generated principally from the January 2007 sale of Cumberland Trace for $10.7 million. The Company has utilized approximately $3.8 million of cash on capital improvements, including $720,000 on the development of the second phase of the Reserve at Wescott Plantation. When completed, phase two will have 96 units and is expected to cost $8.4 million. This project will be financed by a variable rate construction loan with a loan to value percentage not to exceed 75%. As of June 30, 2007, the Company had not drawn upon the loan.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

For the six months ended June 30, 2007, the Company used $15.9 million of cash in financing activities. In 2007, the Company has repaid $9.4 million of bonds and mortgage notes payable, $2.4 million of notes payable and $8.0 million of repurchase agreements payable. Additionally, the Company has paid $5.9 million in dividends. To finance the repayment of the notes payable and repurchase agreements payable, the Company borrowed an additional $10.0 million under the Facility.

Contractual Obligations

The Company had the following contractual obligations as of June 30, 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	$	250,217	$	6,539	$	13,554	$	27,533	$	202,591
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 June 30, 2007 was approximately 5.15% for fixed-rate debt and 3.96% for variable-rate debt.

Recently Issued Accounting Pronouncements

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.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

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.

Set forth below are risk factors relating to the Merger and supplements the risk factors disclosed in Item 1A of Part 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

The Merger Agreement generally requires the Company to pay its own fees and expenses in connection with the Merger and the Company anticipates that such fees and expenses will be approximately $11.9 million if the Merger is completed. The Company cannot assure you that the costs incurred by us in connection with the Merger will not be higher than expected. In addition, the Company will be required to reimburse the Acquirer for its reasonable expenses and fees not to exceed $1 million if (A) the Merger Agreement is terminated by either party due to the failure of the Company’s stockholders to approve the Merger and if prior to such termination an acquisition proposal by a third party has been publicly disclosed or announced and not subsequently withdrawn, or (B) the Merger Agreement is terminated by the Acquirer due to the Company’s breach of the Merger Agreement other than a breach of its covenants relating to acquisition proposals from other parties. In addition, the Company and the Acquirer may terminate the Merger Agreement in certain circumstances which may obligate the Company to pay the Acquirer a termination fee of $8.43 million.

In addition, failure to complete the Merger could negatively impact the price of the Company’s common stock and future business and operations. The Merger is subject to customary conditions to closing, including the receipt of required approval from the Company’s stockholders. If any condition to the Merger is not satisfied or, if permissible, waived, the Merger will not be completed. In addition, the Company and the Acquirer may terminate the Merger Agreement in certain circumstances. If the Company and the Acquirer do not complete the Merger, the market price of the Company common stock may fluctuate to the extent that the current market price of the Company common stock reflects a market assumption that the Merger will be completed.

The Company has also diverted significant management resources in an effort to complete the Merger and is subject to restrictions contained in the Merger Agreement on the conduct of its business. If the Merger is not completed for any reason, the Company will have incurred costs including the diversion of management resources, for which the Company will have received little or no benefit.

Item 4. Submission of Matters to a Vote of Security Holders.

The Company held its annual shareholders’ meeting on May 23, 2007 for the following purposes:

(1) To elect three Class II directors.

(2) To ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007.

A total of 11,045,558 shares of common stock were entitled to vote at the meeting and a total of 9,943,911 shares (90.0%) were represented at the meeting, in person or by proxy. The following sets forth the results of the voting at the annual meeting:

Election of Directors


John H. Cassidy	For— 9,612,343	Withheld— 331,568

George H. Krauss	For— 9,614,168	Withheld— 329,743

Steven W. Seline	For— 9,614,172	Withheld— 329,739

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Ratification of the appointment of Deloitte & Touche LLP


For— 9,878,151		Against— 21,613		Withheld— 44,147

Further information regarding these matters is contained in the Company’s Proxy Statement, dated April 12, 2007.

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, dated June 22, 2007, between the Company, Sentinel Omaha LLC and Sentinel White Plains LLC (incorporated by reference to the Current Report on Form 8-K filed June 25, 2007).

2.2 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).

2.3 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).

2.4 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).

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: August 8, 2007		/s/ John H. Cassidy
		John H. Cassidy
		President and Chief Executive Officer

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents