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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, 2006


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

For the transition period from to

Commission File Number: 000-49986

AMERICA FIRST APARTMENT INVESTORS, INC.

(Exact name of registrant as specified in its charter)


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

1004 Farnam Street, Suite 100 Omaha, Nebraska		68102
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

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

Large accelerated filer o Accelerated filer þ Non- accelerated file 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 4, 2006, there were 11,035,558 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, 2006 and December 31, 2005			1
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2006 and 2005			2
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005			3
Notes to the Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3. Quantitative and Qualitative Disclosures about Market Risk			22
Item 4. Controls and Procedures			22

PART II — OTHER INFORMATION

Item 1. Legal Proceedings			23
Item 1A. Risk Factors			23
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits			24

SIGNATURES			25
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, 2005 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,
	2006			2005
Assets
Cash and cash equivalents	$	7,446		$	4,743
Restricted cash		41,975			53,279
Real estate assets:
Land		35,075			33,835
Buildings		265,305			232,532

Total		300,380			266,367
Less: accumulated depreciation		(41,676	)		(36,789	)

Real estate assets, net		258,704			229,578
Investments in agency securities, at fair value		17			18,189
Investments in corporate equity securities, at fair value		4,021			4,073
Investment in mezzanine loan		—			7,173
Assets of discontinued operations		—			10,155
In-place lease intangibles, net of accumulated amortization of $6,032 and $5,377, respectively		475			550
Other assets		4,770			6,219

Total assets	$	317,408		$	333,959


Liabilities
Accounts payable and accrued expenses	$	10,022		$	8,996
Dividends payable		2,759			2,759
Notes payable		2,413			2,413
Bonds and mortgage notes payable		178,229			185,764
Borrowings under repurchase agreements		13,777			36,202

Total liabilities		207,200			236,134


Contingencies

Stockholders’ Equity
Common stock, $0.01 par value; 500,000,000 shares authorized, 11,035,558 issued and outstanding		110			110
Additional paid-in capital		110,175			110,157
Accumulated deficit		(391	)		(12,318	)
Accumulated other comprehensive income (loss)		314			(124	)

Total stockholders’ equity		110,208			97,825

Total liabilities and stockholders’ equity	$	317,408		$	333,959

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, 2006			June 30, 2005			June 30, 2006			June 30, 2005
Revenues:
Rental revenues	$	12,322		$	10,014		$	23,839		$	19,700
Other revenues		70			68			130			166

Total revenues		12,392			10,082			23,969			19,866


Expenses:
Real estate operating		5,630			4,816			10,681			9,365
Depreciation		2,600			1,884			4,979			3,773
General and administrative		1,584			1,403			3,102			2,983
In-place lease amortization		388			907			657			2,166
Intangible asset impairment		—			—			199			—

Total operating expenses		10,202			9,010			19,618			18,287


Operating income		2,190			1,072			4,351			1,579

Interest and dividend income		399			313			1,338			611
Loss on sale of agency securities		(53	)		—			(53	)		—
Impairment of agency securities and preferred stock		(23	)		—			(367	)		—
Interest expense		(2,602	)		(2,172	)		(5,272	)		(4,247	)

Loss from continuing operations		(89	)		(787	)		(3	)		(2,057	)

Income from discontinued operations		147			280			232			569
Gain on sales of real estate		17,246			—			17,246			—


Net income (loss)		17,304			(507	)		17,475			(1,488	)


Other comprehensive income (loss):
Unrealized holding gains (losses) on securities arising during the period		(59	)		107			(101	)		(166	)
Reclassification adjustments for losses realized in net income (loss)		23						367			—
Unrealized gains (losses) on derivatives		71			(218	)		172			(129	)

		35			(111	)		438			(295	)


Comprehensive income (loss)	$	17,339		$	(618	)	$	17,913		$	(1,783	)


Earnings per share- basic and diluted
Income (loss) from continuing operations	$	(0.01	)	$	(0.07	)	$	(0.00	)	$	(0.20	)
Income from discontinued operations and gain on sales of real estate		1.58			0.02			1.58			0.06

Net income (loss)	$	1.57		$	(0.05	)	$	1.58		$	(0.14	)


Dividends declared per share	$	0.25		$	0.25		$	0.50		$	0.50


Weighted average number of shares outstanding- basic & diluted		11,036			10,511			11,036			10,511

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, except per share amounts)


	For the six months ended,
	June 30, 2006			June 30, 2005
Operating activities
Net income (loss)	$	17,475		$	(1,488	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation		5,102			4,640
Impairment of agency securities and preferred stock		367			—
Intangible asset impairment		199			—
Loss on sale of agency securities		53			—
Gain on sales of real estate		(17,246	)		—
Change in fair value on interest rate swap agreements		(42	)		196
Amortization		735			2,350
Non-cash stock option compensation		18			8
Change in other assets		1,433			(471	)
Change in accounts payable and accrued expenses		140			1,277

Net cash provided by operating activities		8,234			6,512

Investing activities
Real estate capital improvements and acquisitions		(33,823	)		(1,000	)
Acquisition of non-real estate depreciable assets		(134	)		—
Proceeds from sale of real estate		27,506			—
Principal received on agency securities		18,030			3,776
Change in restricted cash		11,304			(297	)
Prepayment of mezzanine loan		7,094			—

Net cash provided by investing activities		29,977			2,479

Financing activities
Dividends paid		(5,548	)		(5,255	)
Repayments of borrowings under repurchase agreements		(22,425	)		(2,000	)
Principal payments on bonds and mortgage notes payable		(7,535	)		(628	)

Net cash used in financing activities		(35,508	)		(7,883	)


Change in cash and cash equivalents		2,703			1,108
Cash and cash equivalents at beginning of period		4,743			10,634

Cash and cash equivalents at end of period	$	7,446		$	11,742


Supplemental disclosure of cash flow information:
Dividends declared but not paid	$	2,759		$	2,628

Cash paid for interest	$	5,538		$	4,278

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, 2006
(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 also invests in agency securities and other real estate assets.

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

The accompanying interim unaudited 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 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, 2005. Other than a modification to the capitalization policy, the Company’s significant accounting policies are consistent with those disclosed in the Annual Report on Form 10-K. Effective January 1, 2006 the Company refined its capitalization policy to allow the capitalization of flooring costs when an entire unit’s carpet or vinyl flooring is replaced. During the three and six months ended June 30, 2006, the Company capitalized approximately $350,000 and $600,000 of such costs. Had the Company continued to follow its previous capitalization policy, net income would have been reduced by $0.03 and $0.05 per share for the three and six months ended June 30, 2006. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial position as of June 30, 2006, 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 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. Discontinued Operations

During the second quarter of 2006, the Company completed the divestitures of the Park at 58^thApartments and the Belvedere Apartments for proceeds of $27.5 million, net of closing costs of approximately $500,000. In connection with these sales, the Company has recognized a gain of $17.2 million. The Company utilized $6.9 million of the proceeds to repay the tax exempt bond financing on the respective properties.

During the third and fourth quarters of 2005, the Company divested three properties, the Park Trace Apartments, The Retreat Apartments, and St. Andrews at Westwood for aggregate proceeds of $54.4 million, net of closing costs of approximately $1.1 million.

The results of operations for these five properties are presented as discontinued operations. The summary results of operations for the aforementioned properties are as follows (in thousands):


	For the three months ended				For the six months ended
	June 30, 2006		June 30, 2005		June 30, 2006		June 30, 2005
Revenues	$	348	$	2,006	$	995	$	4,025
Expenses		201		1,726		763		3,456

Income from discontinued operations	$	147	$	280	$	232	$	569

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)

3. Acquisition of Properties

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 $32.5 million. These purchases were primarily funded from the proceeds received from the fourth quarter 2005 divestiture of St. Andrews of Westwood. Neither of these properties is encumbered by a mortgage.

4. Sale of Agency Securities

During the first quarter of 2006, the Company determined that it would not recover the previously unrecognized losses recorded in accumulated other comprehensive income associated with its agency securities, and accordingly recognized an impairment loss of $344,000. This loss was equal to the difference between the Company’s basis in the agency securities and their fair market 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 an additional loss of $53,000. The entire proceeds were utilized to repay repurchase agreement borrowings and accrued interest thereon.

5. Impairment of Intangible Assets

In connection with the November 2004 acquisition of certain property management assets from America First Properties Management Companies, LLC, the Company assumed property management agreements for five complexes owned by unrelated third parties. These contracts were 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. Additionally, the Company became aware that a significant percentage of the other properties for which it provides third party management services are expected to be sold during 2006. As a result, the Company determined that 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.

6. Borrowings under Repurchase Agreements

Borrowings under repurchase agreements as of June 30, 2006 and December 31, 2005 consisted of the following (in thousands):

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)


	Interest			Maturity		Carrying Amount
Collateral	Rate			Date	Payment Schedule	June 30, 2006		December 31, 2005
Repurchase agreements collateralized by agency securities:
FNMA Pool #759197				repaid	Interest payments and
					principal due at maturity	$	—	$	15,427

FNMA Pool #670676				repaid	Interest payments and
					principal due at maturity		—		2,500


							—		17,927
Other repurchase agreements, collateralized by GNMA Certificates:

Waters Edge				repaid	Interest payments and		—		3,881
					principal due at maturity

Misty Springs		5.18	%	08/22/2006	Interest payments and
					principal due at maturity		2,302		2,919

Monticello		5.58	%	12/26/2006	Interest payments and		4,500		4,500
					principal due at maturity

The Ponds at Georgetown		5.07	%	09/28/2006	Interest payments and
					principal due at maturity		6,975		6,975

						$	13,777	$	36,202

The Company intends to renew the repurchase agreements as they come due with new repurchase agreements having similar terms.

7. Transactions with Related Parties

Advisory Agreement

Prior to the Company’s December 30, 2005 merger with America First Apartment Advisory Corporation (the “Advisor”), the Company received management and advisory services from the Advisor. These services were provided under an Advisory Agreement (“the Agreement”), which included the following provisions: (i) the Advisor administered the day-to-day operations of the Company; (ii) the Advisor acted as the authorized agent on behalf of the Company in connection with the identification, evaluation, purchase, financing, operation and disposition of all real estate assets; (iii) the Advisor provided the executive and administrative personnel and services required for the operation of the Company; (iv) the Advisor maintained the financial records and performed the financial reporting of the Company; and (v) the Advisor provided information to the Board of Directors on an on-going basis.

In connection with these services, the Company made the following payments to the Advisor during the three and six months ended June 30, 2005 (in thousands):


	Three months ended		Six months ended
	June 30, 2005		June 30, 2005
Administrative Fees ⁽¹⁾	$	395	$	783
Administrative Fees-Agency Securities ⁽²⁾	$	5	$	37
Reimbursement of Direct and Allocated Costs ⁽³⁾	$	777	$	1,337

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)


⁽¹⁾		Administrative Fee — General- This fee equaled 0.55% per annum of the sum of: (i) the original principal amount of the bonds originally issued to a predecessor to the Company; (ii) the purchase price paid by the Company for new assets that are held by the Company; (iii) the outstanding principal of mezzanine financing provided by the Company to unaffiliated owners of residential real estate, plus (iv) the value of properties acquired in a merger with America First Real Estate Investment Partners, L.P. with and into the Company. Such fees are included in General and administrative expenses in the condensed consolidated statements of operations and comprehensive income (loss).

⁽²⁾		Administrative Fee — Agency Securities- This fee equaled 0.25% per annum of the outstanding principal balance of all agency securities held by the Company plus an incentive equal to 20% of the amount by which the total net interest income realized by the Company from its portfolio of agency securities during each calendar month exceeded the average dollar amount of stockholders’ equity invested in agency securities during the month times the composite dividend yield reported by the National Association of Real Estate Investment Trusts for equity REITs which invest in residential apartment properties.

⁽³⁾		Reimbursement of Direct and Allocated Costs- The Company reimbursed the Advisor and its affiliate for certain costs and expenses that it incurred in connection with the carrying out of the Company’s business activities.

In addition to the fees discussed above, the Company was obligated to pay the Advisor a property acquisition fee. The fee, which was 1.25% of the gross purchase price of the property, was paid to compensate the Advisor for the identification, evaluation and acquisition of real estate assets. The Company did not acquire any real estate assets in the six months ended June 30, 2005.

Office Lease

In the three and six months ended June 30, 2006, the Company incurred expenses of $44,000 and $86,000, respectively, to lease office space from The Burlington Capital Group, LLC (“Burlington”), which is an affiliate of certain directors of the Company.

Mezzanine Loan

In September 2005, the Company loaned $7.4 million to America First Communities Offutt Developer, LLC (the “Developer”), which is an affiliate of a director 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.

8. Stock Option Plan

The Company adopted a Stock Option Plan (the “Plan”) on April 1, 2002 to permit awards of equity based compensation to individuals providing services to the Company. In May 2006, the Company’s stockholders approved amendments to the Plan (including renaming it as the 2006 Equity Incentive Plan) which added stock appreciation rights, restricted stock, restricted stock units, and performance units to the types of awards available under the Plan. 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.

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R), utilizing the modified prospective method of adoption. Prior to January 1, 2006, the Company accounted for its stock options using the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under this method, the Company recorded compensation expense based upon the estimated fair value of its granted options, over the expected vesting period. Accordingly, the adoption of SFAS No. 123R did not materially impact the Company’s financial statements.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)

Stock option activity for the six month period ended June 30, 2006 is summarized as follows:


	Number of		Weighted Average
	Shares		Exercise Price
Balance at December 31, 2005		61,000		10.83
Granted		5,000		14.07
Cancelled		—		—

Balance at June 30, 2006		66,000	$	11.08


Options exercisable at June 30, 2006		42,750	$	10.07

On February 8, 2006, the Company granted a total of 5,000 non-qualified stock options to acquire common stock at an exercise price of $14.07 per share. The options vest 25% on the grant date and 25% on each of the next three anniversaries of the grant date. The per share estimated fair value of the options is $3.72, as determined using the Black-Scholes option-pricing model with the following assumptions: a risk free interest rate of 4.55% per annum, an expected remaining contractual life of 6 years and an expected volatility rate of 12.7%. These options have an aggregate fair value of approximately $19,000. There were no option grants made during the six months ended June 30, 2005.

As of June 30, 2006, the outstanding options have a remaining average contractual life of 8.1 years. The average contractual life for the exercisable options at June 30, 2006 is 7.4 years. Compensation expense for stock options was $6,000 and $18,000 for the three and six month periods ended June 30, 2006 and $6,900 and $12,400 for the three and six month periods ended June 30, 2005. The Company expects to recognize an additional $56,000 of compensation costs related to previously awarded stock option grants which will vest during the next 3.3 years.

9. Net Income (Loss) Per Share

For the three and six months ended June 30, 2006 and June 30, 2005 all outstanding stock options were excluded from the computation of diluted loss from continuing operations and net income (loss) per share due to the antidilutive impact on loss from continuing operations.

10. Segment Reporting

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

The Company defines each of its multifamily apartment properties as an individual operating segment. It has determined that all multifamily apartment properties have similar economic characteristics and meet the other criteria which permit the multifamily apartment properties to be aggregated into one reportable segment, that being the acquiring, holding, operating and selling of multifamily apartment properties. Prior to the second quarter of 2006, the Company’s chief operating decision-maker assessed operating results based upon net income. Concurrent with the sale of the agency securities, the chief operating decision-maker began to assess operating performance of the remaining operating segments based upon net operating income. Net operating income, as defined by the Company, differs from net income in that it excludes depreciation, amortization, and interest expense from the determination of profit or loss. The Company has recast the segment results for the three and six months ended June 30, 2005 for the new basis of presentation.

The Company’s commercial property is defined as a separate individual operating segment. The Company’s chief operating decision-maker assess and measure segment operating results based on net operating income at the commercial property level.

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.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)

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


	For the three months ended						For the six months ended
	June 30,			June 30,			June 30,			June 30,
	2006			2005			2006			2005
Total revenue
Multifamily	$	12,128		$	9,849		$	23,451		$	19,381
Commercial		194			165			388			319

Total segment revenues		12,322			10,014			23,839			19,700
Other		70			68			130			166

Total revenues	$	12,392		$	10,082		$	23,969		$	19,866


Segment net operating income
Multifamily	$	6,555		$	5,081		$	12,881		$	10,123
Commercial		137			117			277			212

Segment net operating income		6,692			5,198			13,158			10,335


General and administrative expenses		(1,584	)		(1,403	)		(3,102	)		(2,983	)
Interest expense		(2,602	)		(2,172	)		(5,272	)		(4,247	)
Depreciation expense		(2,600	)		(1,884	)		(4,979	)		(3,773	)
In-place lease amortization expense		(388	)		(907	)		(657	)		(2,166	)
Intangible asset impairment		—			—			(199	)		—
Interest income, other income and expenses, net		393			381			1,048			777
Discontinued operations		17,393			280			17,478			569

Total net income (loss)	$	17,304		$	(507	)	$	17,475		$	(1,488	)

11. 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 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 will not have a material adverse effect on the Company’s financial statements.

12. Recently Issued Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in the consolidated 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 provisions of FIN 48 are effective as of the beginning of fiscal 2007. The Company does not anticipate the adoption of this standard will have a material impact on the consolidated financial statements.

13. Subsequent Events

On July 27, 2006, the Company completed the acquisition of Phase II of the Jackson Park Place Apartments, an 80-unit complex located adjacent to the Company’s existing property in Fresno, California for $10.4 million. The transaction was funded through the release of funds from the 1031 exchange account which was established with the proceeds from the sale of the Belvedere Apartments.

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 June 30, 2006 and for the three months then ended:

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES


					Average		Number		Percentage
		Number			Square Feet		of Units		of Units			Economic
Property Name	Location	of Units			Per Unit		Occupied		Occupied			Occupancy ⁽²⁾
Arbor Hills	Antioch, TN		548			827		510		93	%		81	%
Arbors of Dublin	Dublin, OH		288			990		262		91	%		89	%
Bluff Ridge Apartments	Jacksonville, NC		108			873		106		98	%		98	%
Brentwood Oaks Apartments	Nashville, TN		262			852		254		97	%		91	%
Coral Point Apartments	Mesa, AZ		337			780		322		96	%		89	%
Covey at Fox Valley	Aurora, IL		216			948		205		95	%		82	%
Delta Crossing	Charlotte, NC		178			880		162		91	%		67	%
Elliot’s Crossing Apartments	Tempe, AZ		247			717		239		97	%		84	%
Fox Hollow Apartments	High Point, NC		184			877		154		84	%		73	%
Greenbriar Apartments	Tulsa, OK		120			666		114		95	%		86	%
Highland Park Apartments	Columbus, OH		252			891		237		94	%		85	%
Huntsview Apartments	Greensboro, NC		240			875		215		90	%		78	%
Jackson Park Place Apartments	Fresno, CA		296			822		284		96	%		93	%
Lakes of Northdale Apartments	Tampa, FL		216			873		214		99	%		96	%
Littlestone of Village Green	Gallatin, TN		200			987		197		98	%		84	%
Misty Springs Apartments	Daytona Beach, FL		128			786		128		100	%		96	%
Monticello Apartments	Southfield, MI		106			1,027		93		87	%		79	%
Oakhurst Apartments	Ocala, FL		214			790		211		99	%		97	%
Oakwell Farms Apartments	Nashville, TN		414			800		392		95	%		81	%
Shelby Heights	Bristol, TN		100			980		100		100	%		97	%
The Greenhouse	Omaha, NE		126			881		124		99	%		96	%
The Hunt Apartments	Oklahoma City, OK		216			693		214		99	%		96	%
The Park at Countryside	Port Orange, FL		120			720		119		99	%		96	%
The Ponds at Georgetown	Ann Arbor, MI		134			1,002		124		93	%		76	%
The Reserve at Wescott Plantation	Summerville, SC		192			1,083		185		97	%		92	%
Tregaron Oaks Apartments	Bellevue, NE		300			875		291		97	%		96	%
Waterman’s Crossing	Newport News, VA		260			944		257		99	%		95	%
Waters Edge Apartments	Lake Villa, IL		108			814		100		93	%		78	%

			6,110			866		5,813		95	%		87	%


The Exchange at Palm Bay	Palm Bay, FL		72,007	⁽¹⁾		n/a		70,393		98	%		n/a

Executive Summary


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

(2)		Economic occupancy is presented for the three months ended June 30, 2006. Economic occupancy is defined as the net rental income divided by the maximum amount of rental income which could be derived from each property. The statistic is reflective of vacancy, rental concessions and non-rental units such as model units.

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, economic 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. Economic occupancy is calculated as the net rental revenue, prior to the impact of deferring one-time concessions over the life of the affected leases, divided by the gross potential rental revenue which could be derived from the property portfolio. Economic occupancy is reflective of vacancy, rental concessions, and non-revenue units such as model units. The average quarterly same store rent per unit is calculated as the quarterly same store rental revenue divided by the number of units owned at same store properties.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

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.

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


	June 30,			June 30,
	2006			2005
Physical occupancy		95	%		94	%
Economic occupancy		87	%		82	%
Average quarterly same store rent per unit	$	1,994		$	1,906
Net operating income margin		54	%		52	%

During the first half of 2006, the Company improved upon fiscal 2005’s rental revenue growth. Since June 30, 2005, the Company’s economic occupancy has increased 5%. This increase is driven by increased demand, which has allowed the Company to significantly reduce concessions. Demand for apartments has increased due to continued job growth and rising home mortgage rates. Additionally, supply in certain of the Company’s markets has decreased due to the conversion of multifamily apartment properties to condominiums.

Our multifamily property asset base has continued to grow with the acquisitions of The Greenhouse and the Arbors of Dublin for an aggregate purchase price of $32.5 million. These purchases were primarily financed by the proceeds from the 2005 divestiture of St. Andrews at Westwood. The Company expects the portfolio will continue to evolve as we evaluate our properties for continued income growth. As part of this evaluation, we determined that the Park at 58^th Apartments was no longer a strategic asset and sold the property for $5.0 million. The Company also completed the sale of the Belvedere Apartments for approximately $23.2 million. While Belvedere performed well, the current sellers’ market in Florida created an opportunity to redeploy our assets to other properties that will be able to generate a greater long-term return. The sale of the Belvedere Apartments and Park at 58^th resulted in gains of $14.9 million and $2.3 million, respectively. The Company will attempt to defer the majority of the taxable gain through the use of a Section 1031 exchange account. On July 27, 2006, the Company successfully redeployed $10.4 million of the Belvedere sales proceeds with the acquisition of Phase II of the Jackson Park Place Apartments, an 80-unit complex located adjacent to the Company’s existing property in Fresno, California.

We are also benefiting from our transition to a self-advised and self-managed REIT. The elimination of administrative fees previously paid to our former external advisor reduced general and administrative expenses by approximately $780,000 during the six months ended June 30, 2006. Additionally the absence of property acquisition fees created cash savings of an additional $400,000. These savings are partially offset by additional general and administrative costs of $230,000 primarily consisting of incremental salaries of $130,000, which were formerly incurred by the advisor.

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, 2005.

Results of Operations

The following discussion of the Company’s results of operations for the three and six months ended June 30, 2006 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, 2005. 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 the properties sold during 2006 and 2005 as discontinued operations for all periods presented. The property-specific components of net income that are classified as discontinued operations include rental revenue, real estate operating expenses, depreciation expense and interest expense on debt collateralized by the property.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Three Months Ended June 30, 2006 Compared to the Three Months Ended June 30, 2005 (in thousands):


	For the three months		For the three months		Dollar			Percentage
	ended June 30, 2006		ended June 30, 2005		Change			Change
Revenues
Rental revenues	$	12,322	$	10,014	$	2,308			23	%
Other revenues		70		68		2			3	%

Total Revenues		12,392		10,082		2,310			23	%


Expenses
Real estate operating		5,630		4,816		814			17	%
Depreciation		2,600		1,884		716			38	%
General and administrative		1,584		1,403		181			13	%
In-place lease amortization		388		907		(519	)		-57	%

		10,202		9,010		1,192			13	%


Operating Income	$	2,190	$	1,072	$	1,118			104	%

Rental revenues. The acquisitions of Tregaron Oaks Apartments (“Tregaron”), the Reserve at Wescott Plantation (“Wescott”), The Greenhouse, and the Arbors of Dublin (collectively, the “recently acquired properties”) increased rental revenues by approximately $2.0 million. Improvements in economic occupancy at the Company’s multifamily properties increased rental revenue at “same store” properties by 3% or $300,000 from 2005.

Other revenues. Other revenues include fees earned from the management of properties owned by unrelated third parties. Although the Company is managing fewer properties in 2006 than in 2005, increased rental revenues at certain of the managed properties have allowed management fee income to remain consistent with the same quarter in the prior year.

Real estate operating expenses. Real estate operating expenses increased by $870,000 from the three months ended June 30, 2005 due to the recently acquired properties. Included within this overall increase was a decrease of $350,000 due to a change in the Company’s capitalization policy. Prior to 2006, the Company expensed the cost of full unit carpet and vinyl flooring replacements. Such costs are now being capitalized. The savings from the change in capitalization policy were partially offset by losses of approximately $100,000 due to damages from fires and flooding at three of the Company’s properties. The remaining increase is primarily attributable to increased salaries and real estate taxes.

Depreciation expense. The acquisition of the recently acquired properties increased depreciation expense by $600,000. The remaining increase is due to increased depreciation due to additions at the same store properties and additional corporate depreciable assets.

General and administrative expenses. General and administrative expenses increased by $181,000 from the three months ended June 30, 2005. The elimination of administrative fees paid to the former external advisor reduced general and administrative fees by approximately $395,000 from the prior year. The savings are partially offset by $300,000 of additional salary and personnel costs. Such costs increased as the Company increased its staff to perform the services previously provided by the advisor; expanded the training program; and enhanced its supervision of regional property operations. The Company has also incurred approximately $150,000 of professional fees which are expected to be non-recurring. The Company has hired professional service firms to serve as financial advisors and to assist in the evaluation of the Company’s compensation programs.

In-place lease amortization. Amortization expense from in-place lease intangibles decreased significantly in 2006, as the in-place leases obtained in the 2004 merger with America First Real Estate Investment Partners, L.P. (“AFREZ”) became fully amortized in May of 2005.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Other Income and Expenses

Other income and expenses during the second quarter of 2006 and 2005 consisted of the following (in thousands):


	For the three months			For the three months			Dollar			Percentage
	ended June 30, 2006			ended June 30, 2005			Change			Change
Interest and dividend income	$	399		$	313		$	86			27	%
Loss on sale of agency securities		(53	)		—			(53	)		—
Impairment of preferred stock		(23	)		—			(23	)		—
Interest expense		(2,602	)		(2,172	)		(430	)		20	%

Other expense, net	$	(2,279	)	$	(1,859	)	$	(420	)		23	%

Interest and dividend income increased from 2005 due to increased levels of restricted cash. At June 30, 2006, restricted cash consisted primarily of the proceeds from the sale of the Belvedere Apartments and the $16.6 million of cash which collateralizes the Coral Point and Covey at Fox Valley bonds. The incremental earnings on the restricted cash was partially offset by the reduced interest income earned on the agency securities due to their sale in April of 2006. This income was partially offset by the loss upon the sale of the agency securities of $53,000 and an impairment of $23,000 due to the announced early redemption of one of the Company’s preferred stock holdings.

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. The acquisitions of Tregaron and Wescott increased interest expense by approximately $350,000. The acquisitions of the Greenhouse and the Arbors of Dublin did not impact interest expense as these properties were purchased with cash on hand. Increased interest rates on the Company’s repurchase agreement borrowings and subordinated notes increased interest expense by $75,000.

Six Months Ended June 30, 2006 Compared to the Six Months Ended June 30, 2005 (in thousands):


	For the six months		For the six months		Dollar			Percentage
	ended June 30, 2006		ended June 30, 2005		Change			Change
Revenues
Rental revenues	$	23,839	$	19,700	$	4,139			21	%
Other revenues		130		166		(36	)		-22	%

Total Revenues		23,969		19,866		4,103			21	%


Expenses
Real estate operating		10,681		9,365		1,316			14	%
Depreciation		4,979		3,773		1,206			32	%
General and administrative		3,102		2,983		119			4	%
In-place lease amortization		657		2,166		(1,509	)		-70	%
Intangible asset amortization		199		—		199			—

		19,618		18,287		1,331			7	%


Operating Income	$	4,351	$	1,579	$	2,772			176	%

Rental revenues. The recently acquired properties increased rental revenues by approximately $3.4 million. Improvements in economic occupancy at the Company’s multifamily properties increased rental revenue at “same store” properties by 3% or $650,000 from 2005.

Other revenues. Other revenues include fees earned from the management of properties owned by unrelated third parties. These revenues decreased during the first six months of 2006, as the Company is managing fewer properties in 2006 than 2005.

Real estate operating expenses. Real estate operating expenses increased by $1.4 million from the six months ended June 30, 2005 due to the recently acquired properties. Included within the overall increase was a decrease of $600,000 due to the change in the Company’s capitalization policy. The savings from the change in capitalization policy were partially offset by losses of approximately $150,000 due to fires

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

and flooding at three of the Company’s properties. The remaining increase is attributable to increased salaries, real estate taxes, and various landscaping and exterior maintenance projects at certain of the Company’s properties.

Depreciation expense. The acquisition of the recently acquired properties increased depreciation expense by $990,000. Corporate depreciation expense also increased due to additional corporate assets. The remaining increase is due to increased depreciation due to additions at the same store properties.

General and administrative expenses. General and administrative expenses increased by $119,000 from the six months ended June 30, 2005. The elimination of administrative fees paid to the former external advisor reduced general and administrative fees by approximately $783,000 from the prior year. Salary and personnel costs increased by $240,000 from the six months ended June 30, 2005. Included with in the overall salary increase was a decrease of $345,000 due to a fiscal 2005 severance payment. In addition to increased salary costs to replace the services formerly provided by the advisor, the Company incurred additional costs to expand the training program, and to enhance supervision of regional property operations. The Company has also incurred approximately $360,000 of professional fees which are expected to be non-recurring. The Company has hired professional service firms to serve as financial advisors and to assist in the evaluation of the Company’s compensation programs.

Intangible asset impairment. In the first quarter of 2006, the Company recognized an impairment of the intangible asset that was created when certain property management contracts were acquired from America First Properties Management Companies, LLC in November 2004. The impairment occurred because the Company became aware that a significant percentage of the properties for which it provides third party management services are expected to be sold during 2006. As a result, the Company recorded an impairment expense of $199,000.

Other Income and Expenses

Other income and expenses during the first six months of 2006 and 2005 consisted of the following (in thousands):


	For the six months			For the six months			Dollar			Percentage
	ended June 30, 2006			ended June 30, 2005			Change			Change
Interest and dividend income	$	1,338		$	611		$	727			119	%
Loss on sale of agency securities		(53	)		—			(53	)		—
Impairment of agency securities and preferred stock		(367	)		—			(367	)		—
Interest expense		(5,272	)		(4,247	)		(1,025	)		24	%

Other expense, net	$	(4,354	)	$	(3,636	)	$	(718	)		20	%

Interest and dividend income increased from 2005 due to the interest income earned on $29.6 million of the cash proceeds from the sale of St. Andrews which was not fully reinvested in real estate assets until March 22, 2006, as well as the $17.6 million of proceeds from the June 1, 2006 sale of the Belvedere Apartments. Additionally, the Company has approximately $16.6 million of cash invested in interest bearing accounts, which is currently serving as additional collateral for the Coral Point and Covey at Fox Valley bonds. The Company also earned approximately $300,000 of interest income related to the Offutt mezzanine loan, which was repaid on February 27, 2006. This income 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 the 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 securities was sold.

Interest expense represents interest paid and other expenses associated with the taxable and tax-exempt mortgage debt incurred to finance the Company’s investments in multifamily apartment properties. The acquisitions of Tregaron and Wescott increased interest expense by approximately $705,000. Increased interest rates on the Company’s repurchase agreement borrowings and subordinated notes increased interest expense by $320,000.

Discontinued Operations.

During the second quarter, the Company completed the divestitures of the Park at 58^th Apartments and the Belvedere Apartments for aggregate consideration of $27.5 million. These transactions resulted in a gain of $17.2 million. The Company currently does not have any properties held for sale.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Funds from Operations (“FFO”)

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


	For the three months			For the three months			For the six months			For the six months
	ended June 30, 2006			ended June 30, 2005			ended June 30, 2006			ended June 30, 2005
Net income (loss)	$	17,304		$	(507	)	$	17,475		$	(1,488	)
Depreciation expense		2,557			1,884			4,889			3,773
In-place lease amortization		388			907			657			2,166
Depreciation and amortization of discontinued operations		—			433			123			867
Loss on sale of agency securities		53			—			53			—
Impairment of agency securities and preferred stock		23			—			367			—
Less: Gain on sales of real estate		(17,246	)		—			(17,246	)		—


FFO	$	3,079		$	2,717		$	6,318		$	5,318


Shares outstanding		11,036			10,511			11,036			10,511


FFO per share	$	0.28		$	0.26		$	0.57		$	0.51

Funds from Operations increased $362,000, or 13%, and $1 million or 19% for the three and six months ended June 30, 2006, respectively. The increase is attributable to the positive net operating income generated by the recently acquired properties and improved same store net operating income as a result of improved economic occupancy and consistent operating expenses. These improvements are partially offset by increased interest expense.

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). The Company has added back the impairment loss recognized on the Company’s agency securities and preferred stock 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.

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. The Company capitalizes appliances within the individual units such as ovens, refrigerators, and water heaters. In 2006, the Company modified its capitalization policy and began capitalizing the cost of carpet and vinyl flooring for full unit replacements.

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 property performance.


	For the three months ended June 30,												For the six months ended June 30,
	2006						2005						2006						2005
	Physical			Economic			Physical			Economic			Physical			Economic			Physical			Economic
Property Name	Occupancy			Occupancy			Occupancy			Occupancy			Occupancy			Occupancy			Occupancy			Occupancy
Properties historically owned by the Company

Arbor Hills		93	%		81	%		91	%		79	%		92	%		80	%		88	%		79	%
Bluff Ridge Apartments		98	%		98	%		98	%		94	%		98	%		97	%		98	%		96	%
Brentwood Oaks Apartments		97	%		91	%		97	%		90	%		97	%		92	%		97	%		88	%
Coral Point Apartments		96	%		89	%		94	%		82	%		95	%		88	%		93	%		81	%
Covey at Fox Valley		95	%		82	%		85	%		70	%		95	%		81	%		84	%		71	%
Delta Crossing		91	%		67	%		97	%		70	%		92	%		67	%		97	%		70	%
Elliot’s Crossing Apartments		97	%		84	%		95	%		75	%		95	%		83	%		94	%		76	%
Fox Hollow Apartments		84	%		73	%		84	%		72	%		85	%		74	%		83	%		72	%
Greenbriar Apartments		95	%		86	%		92	%		84	%		95	%		86	%		93	%		84	%
Highland Park Apartments		94	%		85	%		97	%		85	%		92	%		83	%		97	%		85	%
Huntsview Apartments		90	%		78	%		91	%		79	%		89	%		78	%		90	%		78	%
Jackson Park Place Apartments		96	%		93	%		94	%		91	%		94	%		92	%		94	%		91	%
Lakes of Northdale Apartments		99	%		96	%		96	%		90	%		99	%		96	%		93	%		87	%
Littlestone of Village Green		98	%		84	%		94	%		80	%		97	%		84	%		94	%		80	%
Misty Springs Apartments		100	%		96	%		100	%		94	%		100	%		96	%		100	%		94	%
Monticello Apartments		87	%		79	%		92	%		83	%		86	%		79	%		92	%		86	%
Oakhurst Apartments		99	%		97	%		98	%		94	%		99	%		98	%		98	%		95	%
Oakwell Farms Apartments		95	%		81	%		95	%		79	%		94	%		81	%		94	%		78	%
Shelby Heights		100	%		97	%		96	%		92	%		100	%		97	%		95	%		92	%
The Hunt Apartments		99	%		96	%		93	%		90	%		98	%		95	%		95	%		92	%
The Park at Countryside		99	%		96	%		98	%		93	%		99	%		96	%		99	%		93	%
The Ponds at Georgetown		93	%		76	%		88	%		79	%		88	%		74	%		89	%		77	%
Waterman’s Crossing		99	%		95	%		98	%		94	%		98	%		94	%		96	%		92	%
Waters Edge Apartments		93	%		78	%		85	%		77	%		91	%		77	%		89	%		77	%

Recently acquired properties ⁽¹⁾
Arbors of Dublin		91	%		89	%		—			—			91	%		89	%		—			—
The Greenhouse		99	%		96	%		—			—			99	%		96	%		—			—
The Reserve at Wescott Plantation		97	%		92	%		—			—			93	%		89	%		—			—
Tregaron Oaks Apartments		97	%		96	%		—			—			98	%		97	%		—			—

		95	%		87	%		94	%		82	%		95	%		86	%		93	%		82	%


(1)		Arbors of Dublin, The Greenhouse, The Reserve at Wescott Plantation, and Tregaron Oaks Apartments were acquired by the Company in March 2006, January 2006, September 2005, and August 2005, respectively.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Quarterly rental revenue per unit


	For the three		For the three
	months ended		months ended
Property Name	June 30, 2006		June 30, 2005		Change			% Change
Properties historically owned by the Company

Arbor Hills	$	1,693	$	1,688	$	5			0	%
Bluff Ridge Apartments		2,060		1,983		77			4	%
Brentwood Oaks Apartments		2,074		2,019		55			3	%
Coral Point Apartments		1,759		1,613		146			9	%
Covey at Fox Valley		2,555		2,241		314			14	%
Delta Crossing		1,632		1,757		(125	)		-7	%
Elliot’s Crossing Apartments		1,952		1,594		358			22	%
Fox Hollow Apartments		1,508		1,452		56			4	%
Greenbriar Apartments		1,509		1,484		25			2	%
Highland Park Apartments		1,633		1,632		1			0	%
Huntsview Apartments		1,623		1,651		(28	)		-2	%
Jackson Park Place Apartments		2,212		2,065		147			7	%
Lakes of Northdale Apartments		2,335		2,117		218			10	%
Littlestone of Village Green		1,867		1,751		116			7	%
Misty Springs Apartments		2,101		1,984		117			6	%
Monticello Apartments		2,385		2,502		(117	)		-5	%
Oakhurst Apartments		2,051		1,996		55			3	%
Oakwell Farms Apartments		1,733		1,676		57			3	%
Shelby Heights		1,797		1,646		151			9	%
The Hunt Apartments		1,573		1,444		129			9	%
The Park at Countryside		2,101		2,006		95			5	%
The Ponds at Georgetown		2,696		2,699		(3	)		0	%
Waterman’s Crossing		2,631		2,489		142			6	%
Waters Edge Apartments		2,370		2,247		123			5	%

Average	$	1,994	$	1,906	$	88			5	% ⁽²⁾


Recently acquired properties ⁽¹⁾
Arbors of Dublin	$	1,840
The Greenhouse		3,171
The Reserve at Wescott Plantation		2,422
Tregaron Oaks Apartments		2,104

Average	$	2,384


(1)		Arbors of Dublin, The Greenhouse, The Reserve at Wescott Plantation, and Tregaron Oaks Apartments were acquired by the Company in March 2006, January 2006, September 2005, and August 2005, respectively.

(2)		The indicated increase is prior to the impact of deferring one-time concessions over the life of the respective leases.


		AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Year to date rental revenue per unit


	For the six		For the six
	months ended		months ended
Property Name	June 30, 2006		June 30, 2005		Change			% Change
Properties historically owned by the Company
Arbor Hills	$	3,349	$	3,359	$	(10	)		0	%
Bluff Ridge Apartments		4,064		3,992		72			2	%
Brentwood Oaks Apartments		4,162		3,951		211			5	%
Coral Point Apartments		3,483		3,198		285			9	%
Covey at Fox Valley		5,011		4,418		593			13	%
Delta Crossing		3,239		3,443		(204	)		-6	%
Elliot’s Crossing Apartments		3,827		3,198		629			20	%
Fox Hollow Apartments		3,045		2,939		106			4	%
Greenbriar Apartments		2,981		2,935		46			2	%
Highland Park Apartments		3,185		3,262		(77	)		-2	%
Huntsview Apartments		3,256		3,230		26			1	%
Jackson Park Place Apartments		4,334		4,149		185			4	%
Lakes of Northdale Apartments		4,632		4,088		544			13	%
Littlestone of Village Green		3,697		3,562		135			4	%
Misty Springs Apartments		4,160		3,923		237			6	%
Monticello Apartments		4,776		5,044		(268	)		-5	%
Oakhurst Apartments		4,107		3,938		169			4	%
Oakwell Farms Apartments		3,408		3,266		142			4	%
Shelby Heights		3,571		3,239		332			10	%
The Hunt Apartments		3,094		2,968		126			4	%
The Park at Countryside		4,179		3,999		180			5	%
The Ponds at Georgetown		5,210		5,417		(207	)		-4	%
Waterman’s Crossing		5,208		4,889		319			7	%
Waters Edge Apartments		4,641		4,639		2			0	%

Average	$	3,942	$	3,794	$	148			4	%⁽²⁾

Recently acquired properties (1)
Arbors of Dublin	$	2,031
The Greenhouse		5,335
The Reserve at Wescott Plantation		4,694
Tregaron Oaks Apartments		4,282

Average	$	4,085


(1)		Arbors of Dublin, The Greenhouse, The Reserve at Wescott Plantation, and Tregaron Oaks Apartments were acquired by the Company in March 2006, January 2006, September 2005, and August 2005, respectively.

(2)		The indicated increase is prior to the impact of deferring one-time concessions over the life of the respective leases.

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 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. 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 mortgages payable; (iv) acquire additional multifamily apartments and other investments and (v) pay dividends. The Company

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

currently expects to maintain dividends at the current rate. While the Company expects to be able to fund 2006’s dividends from cash provided by operations, it may be required to utilize other means including proceeds from the sale of properties.

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

In addition to the funds that the Company may raise through the issuance of additional equity capital, it may also be able to borrow money to finance the acquisition of additional real estate assets. Borrowing to acquire additional multifamily apartment properties is generally in the form of long-term taxable or tax exempt mortgage loans secured by the acquired properties. 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.

The multifamily apartment properties which the Company currently owns are financed under 19 mortgage financings with an aggregate principal balance of $178.2 million as of June 30, 2006. These mortgages consisted of twelve tax-exempt bonds with an aggregate principal balance outstanding of approximately $112.0 million and seven taxable mortgage notes payable with a combined principal balance of approximately $66.2 million. Approximately 74% of these mortgage obligations bear interest at a fixed rate with a weighted average interest rate of 5.09% per annum for the six months ended June 30, 2006. The remaining 26% of these mortgage obligations bear interest at variable rates that had a weighted average interest rate of 3.75% per annum, including swaps, for the six months ended June 30, 2006. Maturity dates on these mortgage obligations range from December 2007 to November 2044

In addition, the Company has outstanding Notes payable of $2.4 million, which were assumed as part of the merger with AFREZ, and bear interest at a variable rate with a weighted average interest rate of 5.61% per annum for the six months ended June 30, 2006. The entire principal amount of the Notes is payable on January 15, 2008.

The Company also has borrowings in the form of repurchase agreements. The borrowings under repurchase agreements bear interest at fixed rates with a current weighted average interest rate of 5.22% per annum and mature within one year.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

In order to mitigate interest rate risk associated with the Company’s variable rate debt, the Company has entered into the following derivative financial instruments.


	Interest Rate Swaps and Caps
		Counterparty						Company
		Notional			Receive/			Notional			Pay
	Maturity	Amount			Cap Rate			Amount			Rate
Fixed to Variable	December 6, 2006	$	5,300	⁽⁴⁾		7.13	%	$	5,300	⁽⁴⁾		4.19	% ⁽³⁾
Fixed to Variable	December 6, 2006	$	5,006	^{(1) (4)}		7.75	%	$	5,006	^{(1) (4)}		4.19	% ⁽³⁾
Fixed to Variable	January 22, 2009	$	8,300	⁽⁴⁾		5.38	%	$	8,300	⁽⁴⁾		4.19	% ⁽³⁾
Variable to Fixed	February 3, 2009	$	8,100			3.54	% ⁽²⁾	$	8,100			2.82	%
Variable to Fixed	June 25, 2009	$	10,910			3.54	% ⁽²⁾	$	10,910			3.30	%
Fixed to Variable	July 13, 2009	$	6,930	⁽⁴⁾		7.25	%	$	6,930	⁽⁴⁾		4.19	% ⁽³⁾
Fixed to Variable	July 13, 2009	$	3,980	⁽⁴⁾		7.50	%	$	3,980	⁽⁴⁾		4.19	% ⁽³⁾
Variable to Fixed	January 15, 2012	$	11,320			3.54	% ⁽²⁾	$	11,320			3.44	%
Interest Rate Cap	December 22, 2009	$	13,400			4.50	%		N/A			N/A
Interest Rate Cap	December 22, 2009	$	12,750			4.50	%		N/A			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 three months ended June 30, 2006.

⁽³⁾		Weighted average Bond Market Association rate for the three months ended June 30, 2006 plus 0.65%.

⁽⁴⁾		These are total return swaps.

The $10.9 million and $8.1 million variable to fixed swaps were entered into on top of and to mitigate the variable rate risk of the fixed to variable swaps maturing July 13, 2009 and January 22, 2009, respectively. These swaps effectively fix the interest rate on $10.9 million and $8.1 million of bonds payable at 3.30% and 2.82% per annum, respectively.

Other than the $11.3 million variable to fixed rate swap, the Company’s interest rate swaps and caps 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 consolidated statement of operations and comprehensive income (loss). For the swap that does qualify as a cash flow hedge, changes in the fair market value of the derivative are recorded as a component of accumulated other comprehensive income.

Cash Flows from Operating, Investing and Financing Activities

Cash provided by operating activities for the six months ended June 30, 2006 increased by $1.7 million compared to the same period a year earlier. The increase is due to a $2.1 million decrease in the Company’s loss from continuing operations.

For the six months ended June 30, 2006, the Company generated $30.0 million of cash from investing activities. The Company received proceeds of $27.5 million from the sales of the Belvedere Apartments and the Park at 58^th Apartments. It also received approximately $18 million in proceeds from the principal repayment and sale of its agency securities. Further increasing cash generated by investing activities was the $7.1 million prepayment of the mezzanine loan made by the Company to the developer of a military housing project at Offutt AFB. These inflows were offset by the purchase of the Arbors of Dublin and the Greenhouse.

For the six months ended June 30, 2006, the Company used $35.5 million of cash in financing activities. Cash was utilized to repay $22.4 million of repurchase agreements, and to repay the Belvedere Apartments and Park at 58^th Apartments bond financings of $4.8 million and $2.1 million, respectively. Additionally, the Company has paid $5.5 million in dividends during the six months ended June 30, 2006.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Recently Issued Accounting Pronouncements

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, 2005 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, 2005.

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 15d-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.

Item 1A, “Risk Factors” of the Company’s 2005 Annual Report on Form 10-K includes a detailed discussion of the Company’s risk factors. There have been no changes to the Company’s risk factors discussed therein.

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

The Company held its annual shareholders’ meeting on May 9, 2006 for the following purposes:

(1) To elect two Class I directors.

(2) To ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2006.

(3) To approve the adoption of the Company’s 2006 Equity Incentive Plan.

(4) To approve the adoption of the Company’s Employee Stock Purchase Plan.

A total of 11,035,558 shares of common stock were entitled to vote at the meeting and a total of 9,408,396 shares (85.3%) 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

Ratification of the appointment of Deloitte & Touche LLP


For— 9,265,550		Against— 47,350		Abstain— 95,495

Adoption of 2006 Equity Incentive Plan


For— 2,598,194		Against— 535,762		Abstain 205,432		Broker Non-vote— 6,069,008

Adoption of Employee Stock Purchase Plan


For— 2,728,293		Against— 429,457		Abstain 181,639		Broker Non-vote— 6,069,007

Further information regarding these matters is contained in the Company’s Proxy Statement, dated April 3, 2006.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Item 6. Exhibits.

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

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

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

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

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

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

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

10.1 Agreement of Purchase and Sale dated April 27, 2006 by and between the Company and Brady Sullivan Properties, LLC, a New Hampshire limited liability company (incorporated by reference to Exhibit 10 to the Current Report on Form 8-K filed May 2, 2006).

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.


		AMERICA FIRST APARTMENT INVESTORS, INC.

Date: August 9, 2006		/s/ John H. Cassidy
		John H. Cassidy
		President and Chief Executive Officer

Michael B. Yanney

For— 9,208,578

Withheld— 199,818

Gregor Medinger

For— 9,208,578

Withheld— 199,818