UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2006
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number: 000-49986

AMERICA FIRST APARTMENT INVESTORS, INC.

(Exact name of registrant as specified in its charter)


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


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

(402) 557-6360

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.01 par Value

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of the chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Act). YES o NO þ

The aggregate market value of the registrant’s common stock held by non-affiliates based on the final sales price of the shares on the last business day of the registrant’s most recently completed second fiscal quarter was $151,934,040.

As of March 5, 2007, there were 11,045,558 outstanding shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement pertaining to its 2007 Annual Shareholders Meeting are incorporated herein by reference into Part III.

AMERICA FIRST APARTMENT INVESTORS, INC.

TABLE OF CONTENTS


PART I
Item 1.	Business	1
Item 1A.	Risk Factors	5
Item 1B.	Unresolved Staff Comments	9
Item 2.	Properties	10
Item 3.	Legal Proceedings	11
Item 4.	Submission of Matters to a Vote of Security Holders	11

PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	11
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	64
Item 9A.	Controls and Procedures	64
Item 9B.	Other Information	66

PART III
Item 10.	Directors and Executive Officers of the Registrant and Corporate Governance	66
Item 11.	Executive Compensation	66
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	66
Item 13.	Certain Relationships and Related Transactions and Director Independence	67
Item 14.	Principal Accounting Fees and Services	67

PART IV
Item 15.	Exhibits and Financial Statement Schedules	67
SIGNATURES		69
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Powers of Attorney
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 this report.

AMERICA FIRST APARTMENT INVESTORS, INC.

PART I


Item 1.	*Business.*

America First Apartment Investors, Inc. (the “Company”) was formed on March 29, 2002 under the Maryland General Corporation Law and is taxed as a real estate investment trust (“REIT”) for Federal income tax purposes. The Company is the successor to America First Apartment Investors, L.P. (the “Partnership”) which merged with the Company as of January 1, 2003. As a result of this merger, the Company assumed the assets, liabilities and business operations of the Partnership. The Company had no material assets or operations prior to its merger with the Partnership. Accordingly, any operations or financial results of the Company described herein for periods prior to January 1, 2003 are those of the Partnership.

On June 3, 2004, the Company merged with America First Real Estate Investment Partners, L.P. (“AFREZ”). As a result of the merger, AFREZ was merged with and into the Company. The Company was the surviving entity and assumed all of the assets, liabilities and business operations of AFREZ, including 14 multifamily apartment properties containing 2,783 rental units.

As of December 31, 2006, the Company owned 33 multifamily apartment properties containing a total of 7,484 rental units and a 72,007 square foot office/warehouse facility. The Company’s multifamily apartment properties are located in the states of Arizona, California, Florida, Illinois, Michigan, Missouri, Nebraska, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, and Virginia. On January 31, 2007, the Company sold Cumberland Trace, a 248 unit property, located in Fayetteville, North Carolina, for $10.9 million.

Operating and Investment Strategy

The Company’s operating and investment strategy primarily focuses on multifamily apartment properties as long-term investments. The Company’s operating goal is to generate increasing amounts of net rental income from these properties that will allow it to provide shareholders with a secure and growing dividend and build shareholder value through selective property acquisitions and dispositions that further increase net rental income. In order to achieve this goal, management of these multifamily apartment properties is focused on: (i) maintaining high physical occupancy and increasing rental rates through effective leasing, reduced turnover rates and providing quality maintenance and services to maximize resident satisfaction; (ii) managing operating expenses and achieving cost reductions through operating efficiencies and economies of scale generally inherent in the management of a portfolio of multiple properties; and (iii) emphasizing regular programs of repairs, maintenance and property improvements to enhance the competitive advantage and value of its properties in their respective market areas.

The Company focuses its acquisition efforts on established multifamily apartment properties located in markets with positive growth prospects. In particular, the Company seeks out properties that it believes have the potential for increased revenues through more effective management. In connection with each potential property acquisition, the Company reviews many factors, including the following: (i) the age and location of the property; (ii) the construction quality, condition and design of the property; (iii) the current and projected cash flow generated by the property and the potential to increase cash flow through more effective management; (iv) the potential for capital appreciation of the property; (v) the potential for rental rate increases; (vi) the expected required capital expenditures; (vii) the economic situation in the community in which the property is located and the potential changes thereto; (viii) the occupancy and rental rates at competing properties; and (ix) the potential for liquidity through financing or refinancing of the property or the ultimate sale of the property. The Company does not have any limitations on the percentage of its assets which may be invested in any one property or on the number of properties that it may own in any particular geographic market.

The Company may sell real estate assets from time to time and, in general, it expects to reinvest the net proceeds received from the sale of properties rather than to distribute the net sale proceeds as dividends to shareholders. The Company may sell properties in order to redeploy assets from markets which are overbuilt or declining economically into markets which provide better opportunities for growth in rental income and capital

appreciation. In addition, the Company may sell a property that is inconsistent with the Company’s strategic plan and reinvest the net sale proceeds in new properties.

The Company may also invest in other types of real estate assets including:

(i) Equity investments in other REITs and similar real estate companies which can include publicly traded common stocks. The Company may also acquire controlling and non-controlling interests in other real estate businesses such as property management companies. The Company may decide to invest available cash in these types of securities, but must do so in compliance with REIT tax requirements and in a manner that will not subject it to registration as an investment company under the Investment Company Act of 1940. As of December 31, 2006, the Company had investments of this type with a fair market value of approximately $3.5 million.

(ii) Agency securities issued or guaranteed as to the payment of principal or interest by an agency of the U.S. government or a federally-chartered corporation such as the Federal National Mortgage Association (“FNMA”), Government National Mortgage Association (“GNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”) (“agency securities”). Agency securities acquired by the Company are secured by pools of first mortgage loans on single-family residences. Agency securities held by the Company bear interest at an adjustable interest rate or at a fixed rate for an initial period of time (typically one to three years) and then convert to a one-year adjustable rate for the remaining loan term. During 2006, the Company sold substantially all of its investments in agency securities.

(iii) Mezzanine-level financing provided to developers and operators of residential real estate which can take a variety of forms including subordinated mortgage loans and preferred equity investments. These mezzanine level investments will generally be structured to provide the Company with a minimum return by way of a fixed base rate of interest or preferred dividend as well as the opportunity to participate in the excess cash flow and sales proceeds of the underlying apartment property through the payment of participating interest and additional dividends. As of December 31, 2006, the Company did not have any mezzanine level investments.

By including investments in other real estate companies, agency securities, and mezzanine-level financing of residential real estate, the Company has the ability to supplement and stabilize its cash flow by investing in assets that are less affected by the variables that affect the cash flow generated by investments in apartments. In addition, investments in agency securities allow the Company to quickly invest the proceeds from the sale of stock or from the sale of any of its real property investments at potentially higher returns than traditional money market investments. The overall mix of these various types of investments will vary from time to time as the Company seeks to take advantage of opportunities in the real estate industry. In general, however, it is anticipated that at least 80% of the Company’s assets will be invested in multifamily apartment properties.

All investments made by the Company must be made in compliance with applicable requirements for maintaining its status as a 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 Company’s ordinary taxable income to shareholders. It is the Company’s current intention to adhere to these requirements and maintain its REIT status.

The Company may modify the investment policies from time to time without the vote of the shareholders.

Financing Strategies

The Company has the authority to finance the acquisition of additional real estate assets in a variety of manners, including raising additional equity capital, reinvestment of cash flows and or borrowings. If the Company raises additional equity capital through the issuance of shares of its stock, it may issue shares of common stock or shares of one or more classes of preferred stock. Shares of preferred stock, if any, would have rights and privileges different from common stock, which may include preferential rights to receive dividends. At this time, the Board of Directors has not authorized the issuance of any shares of preferred stock.

If the Company decides to sell shares, it may do so in a number of different manners, including a rights offering directly to existing shareholders, an underwritten public offering or in a private placement negotiated with a small number of investors. The Company may also issue shares to the owners of multifamily apartment properties that it acquires as full or partial payment for those properties. In June 2004, the Company filed a Form S-3 registration statement for $200 million of any combination of common stock and preferred stock in one or more offerings 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 might be raised through the issuance of additional equity capital, the Company is also able to borrow money in a variety of manners in order to acquire additional real estate assets. Borrowings 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. In the third quarter of 2006, the Company entered into a Master Credit Facility and Reimbursement Agreement (the “Facility”) with Wells Fargo Bank, N.A. and Fannie Mae. The Facility was initially established for $70.5 million and may be expanded with the consent of the lenders. 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. The Facility is secured by first mortgages on Covey at Fox Valley, Cornerstone Apartments, Morganton Place, Village of Cliffdale, Woodberry Apartments, The Greenhouse, Arbors of Dublin, and Brentwood Oaks.

The Facility also provides 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. These borrowings have a term of ten years from the date of the transaction.

Borrowings may be made at either fixed or variable interest rates, but the Company intends to utilize more fixed rate debt than variable rate debt to finance multifamily apartment properties. The terms of some mortgage debt requires periodic payments of principal and interest, while other mortgage financings require only periodic payments of interest with the entire principal due at the end of the loan term. Mortgage loans on our properties will generally be made on a non-recourse basis, which means that the lender’s source of payment in the event of a default is limited to foreclosure of the underlying property or properties securing the mortgage loan.

The amount of debt the Company can incur is not limited by its Charter 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. In addition, as a practical matter, the Company’s ability to borrow additional money will be limited if it can not issue additional capital stock in order to increase equity. As a general matter, the Company does not intend to use second mortgages on our properties; however, it is not prohibited from doing so.

Properties financed by tax exempt mortgage debt are subject to numerous restrictive covenants, including a requirement that a percentage of the apartment units in each such property be occupied by residents whose income does not exceed a percentage of the median income for the area in which the property is located. These covenants can, and often do, remain in effect until the bonds mature which may be as long as 30 or 40 years. Because of these restrictions, it is possible that the rents charged by these properties may be lowered, or rent increases foregone, in order to attract enough residents meeting the income requirements. In the event that such requirements are not met, interest on mortgage debt could become subject to federal and state income tax, which would result in either an increase in the interest rate we would have to pay or an early termination of the loan that would force the Company to obtain alternative financing. Alternative financing, if available, would generally be expected to be provided by taxable borrowings and, therefore, would be at higher interest rates than the original tax exempt mortgage loan on the property. If alternative financing is not available, we may be forced to sell the property or could lose the property in foreclosure.

The Company may also use some of its current cash flow to partially finance the acquisition of additional multifamily apartment complexes or other investments, but it does not intend to use current cash flows as a primary method of financing these acquisitions and does not intend to reduce dividend levels in order to finance acquisitions of additional real estate investments.

Internalization transactions

On December 30, 2005, the Company completed its transition from being externally advised to being self-advised through the merger of America First Apartment Advisory Corporation (“AFAAC” or “Advisor”) into the Company. The aggregate merger consideration of $11.4 million consisting of $4.0 million in cash, and 525,000 shares of Company stock, was paid to the Burlington Capital Group, LLC (formerly America First Companies LLC), the parent of AFAAC (“Burlington”). As a result of this transaction, the Company no longer obtains executive and administrative services from the Advisor, no longer pays an administrative fee based upon the Company’s asset base, nor is it required to pay acquisition fees on future asset purchases. In the transaction the Company assumed the employment agreements of its Chief Executive Officer, Chief Investment Officer, and Chief Financial Officer from Burlington.

The internalization process was initiated with the November 2004 acquisition of certain property management assets, rights to use certain proprietary systems, certain property management agreements, certain employment agreements and other intangible assets from America First Properties Management Companies, LLC. (“America First Properties”) and its parent, Burlington. Prior to this transaction, America First Properties managed each of the multi-family apartment complexes owned by the Company.

AFREZ Merger

The Company issued shares of its common stock and paid cash to the holders of the limited partner and general partner interests in AFREZ upon consummation of the merger. Each Unit representing an assigned limited partnership interest in AFREZ as of the date of the merger was converted into the right to receive 0.7910 shares of the common stock of the Company and a cash payment of $0.39 per Unit. Fractional shares were rounded up or down to the nearest whole number. A total of 5,376,353 shares of the common stock of the Company were issued to Unit holders in connection with the merger plus a cash payment of $2.7 million. The general partner’s 1% interest in AFREZ was converted into 54,308 shares of the common stock of the Company plus a cash payment of approximately $27,000. The general partner was an affiliate of the Advisor.

Competition

In each city where the Company’s properties are located, the properties compete with a substantial number of other multifamily properties. Multifamily properties also compete with single-family housing that is either owned or leased by potential tenants. To compete effectively, the Company must offer quality apartments at competitive rental rates. In order to maintain occupancy rates and attract quality tenants, the Company may also offer rental concessions, such as free rent to new tenants for a stated period. The Company also competes by offering a quality apartment lifestyle, in attractive locations and providing tenants with amenities such as recreational facilities, garages and pleasant landscaping.

The Company also competes for opportunities to acquire real estate investments against numerous other REITs, banks, insurance companies and pension funds, as well as corporate and individual owners of real estate. Many of these competitors have significantly greater financial resources than the Company.

Environmental Matters

The Company believes that each of its properties is in compliance, in all material respects, with federal, state and local regulations regarding hazardous waste and other environmental matters and is not aware of any environmental contamination at any of its properties that would require any material capital expenditure by the Company for the remediation thereof.

Information Available on Website

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and press releases are available free of charge at www.apro-reit.com as soon as reasonably practical after they are filed with the Securities and Exchange Commission (“SEC”).


Item 1A.	*Risk Factors.*

The financial condition and results of operations of the Company and its ability to pay dividends are affected by various factors, many of which are beyond the Company’s control. These include the following:

The Company may not be able to successfully implement its business plan.

There can be no assurance that the Company will be able to successfully implement its business plan of raising capital and making additional investments in multifamily apartment properties, agency securities and other residential real estate assets. Among other things, it may not be able to locate additional real estate assets that can be acquired on acceptable terms, and it may not be able to raise additional equity capital or obtain additional debt financing on terms that would be acceptable in order to finance the acquisition of additional real estate assets. If additional equity capital is raised, but the Company is not able to invest it in additional apartment complexes, agency securities or other real estate assets that generate net income at least equivalent to the levels generated by its then existing assets, earnings per share could decrease. In that case, the level of dividends that the Company is able to pay may be reduced and the market price of the common stock may decline.

The Company’s financial results are substantially dependent upon the performance of the multifamily apartment complexes.

The performance of the multifamily apartment complexes is affected by a number of factors, some of which are beyond the Company’s control. These include general and local economic conditions, the relative supply of apartments and other homes in the market area, interest rates on single family mortgages and its effect on home buying, the need for and costs of repairs and maintenance of the properties, government regulations and the cost of complying with them, property tax rates imposed by local taxing authorities, utility rates and property insurance rates. If interest rates on single-family mortgages continue to remain low, it could further increase home buying and continue to reduce the number of quality tenants available. In addition, the financing costs, operating costs and the costs of any necessary improvements and repairs to the apartment properties may exceed expectations. As a result, the amount of cash available for distribution to the shareholders could decrease and the market price of the Company’s common stock could decline.

The Company is not completely insured against damages to its properties.

The Company owns several apartment complexes and other properties that are in areas that are prone to damage from hurricanes and other major storms, including four apartment complexes and one commercial property located in Florida. Due to the significant losses incurred by insurance companies on policies written on properties in Florida damaged by hurricanes, property and casualty insurers in Florida have modified their approach to underwriting policies. As a result, the Company assumes the risk of first loss on a larger percentage of the value of its Florida real estate. If any of these properties were damaged in a hurricane or other major storm, the losses incurred could be significant. The Company’s current policies carry a 5% deductible on the insurable value of the properties if damage is caused by such a storm. The current insurable value of the Florida properties is approximately $31.3 million. Additionally, the Company does not carry flood insurance for those properties located outside of designated flood zones. The Company also does not carry specific insurance for losses resulting from acts of terrorism and such losses may be excluded from coverage under its existing insurance policies.

The Company is subject to the risk normally associated with debt financing.

The Company’s real estate investments are financed with mortgage debt and this subjects it to the risk that the cash flow may not be sufficient to meet required payments of principal and interest on the debt. In addition, the terms of some of the mortgage debt does not require that the principal of the debt be repaid prior to maturity.

Therefore, it is likely that the Company will need to refinance at least a portion of this debt as it matures. There is a risk that the terms of any such refinancing will not be as favorable as the existing debt. In addition, the Company may not be able to refinance the entire amount of the existing debt. This could happen, for example, if the collateral value of the financed real estate has declined or if lenders require a lower loan to value ratio at the time of refinancing. The Company’s obligations to make principal debt service payments, which are not treated as deductions for federal income tax purposes, does not relieve it from the obligation of distributing at least 90% of its REIT taxable income to the shareholders. In addition, the Company’s borrowings will be secured by first mortgages on the Company’s real estate assets. This exposes the Company to a risk of losing its interests in the assets given as collateral for secured borrowings if it is unable to make the required principal and interest payments when due. In addition, pledged assets may not be available to shareholders in the event of the liquidation of the Company to the extent that they are used to satisfy the amounts due to creditors. The ability to pay dividends to the shareholders is subordinated to the payment of debt service on the Company’s debt and other borrowings.

Real estate financed with tax-exempt debt is subject to certain restrictions.

A number of the Company’s multifamily apartment complexes are financed with tax-exempt bond financing. This type of financing is designed to promote the supply of affordable rental housing and, accordingly, it subjects the financed property to certain restrictive covenants, including a requirement that a percentage of the apartment units in each property be occupied by residents whose income does not exceed a percentage of the median income for the area in which the property is located. Generally, the Company’s financing agreements require that 20% of the apartment units be rented to individuals whose income is less than 80% of the areas’ median income. It is possible that such covenants may cause the rents charged by these properties to be lowered, or rent increases foregone, in order to attract enough residents meeting the income requirements. In the event the Company does not comply with these restrictions, the interest on the bonds could become subject to federal and state income tax, which would result in either an increase in the interest rate on the bonds or an early redemption of these bonds that would force the Company to obtain alternative financing or sell the property financed by the bond.

Fluctuating interest rates may affect earnings.

Some of the tax-exempt mortgage debt bears interest at variable rates. The variable rate mortgage debt is tied to a tax-exempt index that is reset on a weekly basis. Increases in these variable interest rates increase the Company’s interest expense.

Likewise, the borrowings under repurchase agreements is similar to variable rate debt since the effective interest rate on these repurchase agreements is reset to the current market rates each time the term of the repurchase agreement is renewed. Repurchase agreements typically have terms between one and six months. An increase in market interest rates would cause the interest rates of the obligations to increase when and if they are renewed upon maturity. If interest rates increase, the Company will have to pay more interest on its debt, but would not necessarily be able to increase rental income from the multifamily apartment properties. Therefore, an increase in interest rates may reduce earnings and this may reduce the amount of funds that the Company has available for distribution to shareholders. This may also affect the market price of the common stock.

The use of derivatives to mitigate interest rate risks may not be effective.

The Company’s policies permit it to enter into interest rate swaps, caps and floors and other derivative transactions to help mitigate interest rate risks. No hedging strategy, however, can completely insulate the Company from the interest rate risks to which it is exposed. Furthermore, certain of the federal income tax requirements that the Company must satisfy in order to qualify as a REIT limit its ability to hedge against such risks.

Multifamily apartment properties are illiquid and their value may decrease.

A substantial amount of the Company’s assets consist of investments in multifamily apartment properties. These investments are relatively illiquid. The ability to sell these assets, and the price received upon sale are affected by a number of factors including the number of potential and interested buyers, the number of competing properties

on the market in the area and a number of other market conditions. As a result, the Company may not be able to recover its entire investment in an apartment complex upon sale.

There are risks associated with making mezzanine investments that differ from those involved with owning multifamily apartment properties.

In general, mezzanine level financing provided by the Company will be subordinate to senior lenders on the financed properties. Accordingly, in the event of a default on investments of this type, senior lenders will have a first right to the proceeds from the sale of the property securing their loan and this may result in the Company receiving less than all principal and interest it is owed on the mezzanine level financing. Also, since mezzanine level financings are expected to participate in the cash flow or sale proceeds from a financed property, they may carry a base interest rate different than a non-participating financing. However, there can be no assurance that an apartment complex financed with such a participating feature will generate excess cash flow or sale proceeds that will require any payments over the base return payable on the mezzanine financing. Accordingly, investments in mezzanine financings will not necessarily generate any additional earnings and may result in lower earnings or losses and, as a result, the amount of cash available for distribution to shareholders and the market price of the common stock could decline.

Because of competition, the Company may not be able to acquire investment assets.

In acquiring investment assets, the Company competes with a variety of other investors including other REITs and real estate companies, insurance companies, mutual funds, pension funds, investment banking firms, banks and other financial institutions. Many of the entities with which the Company competes have greater financial and other resources. In addition, many of the Company’s competitors are not subject to REIT tax compliance and may have greater flexibility to make certain investments. As a result, the Company may not be able to acquire apartment complexes, agency securities or other investment assets or it may have to pay more for these assets than it otherwise would.

Company policies may be changed without shareholder approval.

The Board of Directors establishes all of the Company’s fundamental operating policies; including the investment, financing and distribution policies, and any revisions to such policies would require the approval of the Board. Although the Board of Directors has no current plans to do so, it may amend or revise these policies at any time without a vote of the shareholders. Policy changes could adversely affect the Company’s financial condition, results of operations, the market price of the common stock or the Company’s ability to pay dividends or distributions.

The Company has not established a minimum dividend payment level.

The Company intends to pay dividends on its common stock in an amount equal to at least 90% of its REIT taxable income (determined with regard to the dividends paid deduction and by excluding net capital gains) in order to maintain its status as a REIT for federal income tax purposes. Dividends will be declared and paid at the discretion of the Board of Directors and will depend on earnings, financial condition, maintenance of REIT status and such other factors as the Board of Directors may deem relevant from time to time. The Company has not established a minimum dividend payment level and its ability to pay dividends may be adversely affected for the reasons set forth in this section.

The concentration of real estate in a geographical area may make the Company vulnerable to adverse changes in local economic conditions.

The Company does not have specific limitations on the total percentage of real estate investments that may be located in any one geographical area. Consequently, real estate investments that it owns may be located in the same or a limited number of geographical regions. As a result, adverse changes in the economic conditions of the geographic regions in which the real estate investments are concentrated may have an adverse effect on real estate

values, rental rates and occupancy rates. Any of these could reduce the income earned from, or the market value of, these real estate investments.

Owning real estate may subject the Company to liability for environmental contamination.

The owner or operator of real estate may become liable for the costs of removal or remediation of hazardous substances released on the Company’s property. Various federal, state and local laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The Company cannot make any assurances that the multifamily apartment properties in which it currently owns, or those it may acquire in the future, will not be contaminated. The costs associated with the remediation of any such contamination may be significant and may exceed the value of the property causing the Company to lose its entire investment. In addition, environmental laws may materially limit the use of the properties underlying the real estate investments and future laws, or more stringent interpretations or enforcement policies of existing environmental requirements, may increase the Company’s exposure to environmental liability.

Compliance with the requirements of Governmental Laws and Regulations could be costly.

Many laws and governmental regulations are applicable to our properties and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently. Under the Americans with Disabilities Act of 1990 (the “ADA”), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Compliance with the ADA requires removal of structural barriers to handicapped access in certain public areas where such removal is “readily achievable.” The ADA does not, however, consider residential properties, such as apartment communities, to be public accommodations or commercial facilities, except to the extent portions of such facilities, such as a leasing office, are open to the public. A number of additional federal, state and local laws exist which also may require modifications to the properties, or restrict certain further renovations thereof, with respect to access thereto by disabled persons. For example, the Fair Housing Amendments Act of 1988 (the “FHAA”) requires apartment communities first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with the ADA or the FHAA could result in the imposition of fines or an award of damages to private litigants.

The issuance of additional shares of stock could cause the price of the Company’s stock to decline.

The Company has the authority to issue additional equity. These may be shares of common stock or shares of one or more classes of preferred stock. Shares of preferred stock, if any, would have rights and privileges different from common stock, which may include preferential rights to receive dividends. The issuance of additional common stock or other forms of equity could cause dilution of the existing shares of common stock and a decrease in the market price of the common stock.

There are a number of risks associated with being taxed as a REIT.

The Company’s status as a REIT subjects it and its shareholders to a number of risks, including the following:


	•	*Failure to qualify as a REIT would have adverse tax consequences.*

In order to maintain its status as a REIT, the Company must meet a number of requirements. These requirements are highly technical and complex and often require an analysis of various factual matters and circumstances that may not be completely within the Company’s control. Even a technical or inadvertent mistake could jeopardize the Company’s status as a REIT. Furthermore, Congress and the Internal Revenue Service (the “IRS”) might make changes to the tax laws and regulations, and the courts might issue new rulings, that make it more difficult or impossible to remain qualified as a REIT. If the Company fails to qualify as a REIT, it would be subject to federal income tax at regular corporate rates. Therefore, it could have less funds available for investments and for distributions to the shareholders and it would no longer be required to make any distributions to the shareholders. This may also have a significant adverse effect on the market value of the common stock. In general, the Company would not be able to elect REIT status for four years after a year in which it loses that status as a result of a failure to comply with one or more of the applicable requirements.


	•	*If the Company fails to qualify as a REIT, the dividends will not be deductible, and the Company’s income will be subject to taxation.*

If the Company were to fail to qualify as a REIT in any taxable year, it would not be allowed a deduction for distributions to the shareholders in computing taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on taxable income at regular corporate rates. Unless entitled to relief under certain provisions of the Code, the Company would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. As a result, amounts available for distribution to shareholders would be reduced for each of the years involved. Although the Company currently intends to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations could cause it to revoke its election to be taxed as a REIT.


	•	*Failure to make required distributions would subject the Company to income taxation.*

In order to qualify as a REIT, each year the Company must distribute to shareholders at least 90% of REIT taxable income (determined without regard to the dividend paid deduction and by excluding net capital gains). To the extent that the Company satisfies the distribution requirement, but distributes less than 100% of taxable income, it will be subject to federal corporate income tax on the undistributed income. In addition, the Company will incur a 4% nondeductible excise tax on the amount, if any, by which the distributions in any year are less than the sum of:


	•	85% of ordinary income for that year;

	•	95% of capital gain net income for that year; and

	•	100% of undistributed taxable income from prior years.

Differences in timing between the recognition of income and the related cash receipts or the effect of required debt amortization payments could require the Company to borrow money or sell assets to pay out enough of the taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax in a particular year.

Loss of Investment Company Act exemption would adversely affect the Company.

The Company intends to conduct its business so as not to become regulated as an investment company under the Investment Company Act. If it fails to qualify for this exemption, the Company’s ability to use borrowings would be substantially reduced and it would be unable to conduct its business. The Investment Company Act exempts entities that are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. Under the current interpretation of the SEC staff, in order to qualify for this exemption, the Company must maintain at least 55% of its assets directly in these qualifying real estate interests. Mortgage-backed securities that do not represent all the certificates issued with respect to an underlying pool of mortgages may be treated as securities separate from the underlying mortgage loans and, thus, may not qualify for purposes of the 55% requirement. Therefore, the ownership of these mortgage-backed securities is limited by the provisions of the Investment Company Act. In order to insure that the Company at all times qualifies for the exemption from the Investment Company Act, it may be precluded from acquiring mortgage-backed securities whose yield is somewhat higher than the yield on mortgage-backed securities that could be purchased in a manner consistent with the exemption. The net effect of these factors may be to lower net income.


Item 1B.	*Unresolved Staff Comments.*

None.


Item 2.	*Properties.*

Properties owned by the Company as of December 31, 2006 are described in the following table:


					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		507		93	%
Arbors of Dublin	Dublin, OH		288			990		266		92	%
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		315		93	%
Cornerstone Apartments	Independence, MO		420			887		371		88	%
Covey at Fox Valley	Aurora, IL		216			948		205		95	%
Cumberland Trace(1)	Fayetteville, NC		248			958		201		81	%
Elliot’s Crossing Apartments	Tempe, AZ		247			717		230		93	%
Fox Hollow Apartments	High Point, NC		184			877		158		86	%
Greenbriar Apartments	Tulsa, OK		120			666		113		94	%
Highland Park Apartments	Columbus, OH		252			891		234		93	%
Huntsview Apartments	Greensboro, NC		240			875		220		92	%
Jackson Park Place Apartments	Fresno, CA		296			822		281		95	%
Jackson Park Place Apartments — Phase II	Fresno, CA		80			1,096		73		91	%
Lakes of Northdale Apartments	Tampa, FL		216			873		214		99	%
Littlestone of Village Green	Gallatin, TN		200			987		194		97	%
Misty Springs Apartments	Daytona Beach, FL		128			786		128		100	%
Monticello Apartments	Southfield, MI		106			1,027		94		89	%
Morganton Place	Fayetteville, NC		280			962		257		92	%
Oakhurst Apartments	Ocala, FL		214			790		211		99	%
Oakwell Farms Apartments	Nashville, TN		414			800		398		96	%
Shelby Heights	Bristol, TN		100			980		99		99	%
The Greenhouse	Omaha, NE		126			881		124		98	%
The Hunt Apartments	Oklahoma City, OK		216			693		210		97	%
The Park at Countryside	Port Orange, FL		120			720		118		98	%
The Ponds at Georgetown	Ann Arbor, MI		134			1,002		124		93	%
The Reserve at Wescott Plantation	Summerville, SC		192			1,083		180		94	%
Tregaron Oaks Apartments	Bellevue, NE		300			875		289		96	%
Village at Cliffdale	Fayetteville, NC		356			798		321		90	%
Waterman’s Crossing	Newport News, VA		260			944		254		98	%
Waters Edge Apartments(1)	Lake Villa, IL		108			814		101		94	%
Woodberry Apartments	Asheville, NC		168			837		163		97	%

			7,484			876		7,012		94	%

The Exchange at Palm Bay	Palm Bay, FL		72,007	(2)		n/a		69,193		96	%


(1)		Property is held for sale as of December 31, 2006.

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

In the opinion of the Company’s management, each of the properties is adequately covered by insurance. For additional information concerning the properties, see Note 7 to the Company’s consolidated financial statements. A discussion of general competitive conditions to which these properties are subject is included in Item 1 of this report.


Item 3.	*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 4.	*Submission of Matters to a Vote of Security Holders.*

No matter was submitted during the fourth quarter of the fiscal year ended December 31, 2006 to a vote of the Company’s security holders.

PART II


Item 5.	*Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.*

(a) Market Information. Shares of the Company trade on the NASDAQ Global Market under the trading symbol “APRO”. The following table sets forth the high and low sale prices for the shares for each quarterly period in 2006 and 2005.


2006	High		Low

1st Quarter	$	15.01	$	13.65
2nd Quarter	$	16.01	$	12.58
3rd Quarter	$	17.08	$	14.50
4th Quarter	$	20.70	$	15.92


2005	High		Low

1st Quarter	$	12.76	$	11.30
2nd Quarter	$	12.13	$	11.25
3rd Quarter	$	13.14	$	11.56
4th Quarter	$	14.67	$	12.16

(b) Shareholders. As of December 31, 2006 there were approximately 1,130 shareholders of record, and approximately 8,300 “street-name” beneficial holders whose shares are held in names other than their own.

(c) Dividends. Dividends to shareholders were made on a quarterly basis during 2006 and 2005. Total dividends declared to shareholders during the fiscal years ended December 31, 2006 and 2005 amounted to $11.3 million and $10.6 million, respectively.

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for information regarding the sources of funds that will be used for cash dividends and for a discussion of factors which may affect the Company’s ability to pay cash dividends at the same levels in 2007 and thereafter.

(d) Equity Compensation Plan Information

The following equity compensation plan information summarizes plans and securities approved by, and not approved by, security holders as of December 31, 2006.

(a)

(b)

(c)

Number of Securities

Remaining Available

to be Issued

Weighted-Average

for Future Issuance

Upon Exercise of

Exercise Price of

Under Equity Compensation

Outstanding Options,

Plans (Excluding Securities

Plan Category

Warrants and Rights

Reflected in Column (a))

Equity compensation plans approved by security holders

152,467

(1)

14.88

582,533

Equity compensation plans not approved by security holders

—

Total

152,467

14.88

582,533


(1)		Weighted-average term to expiration for these options is 9.1 years.

(E) Stock Performance Graph

The following stock performance graph and table provide a comparison over the five-year period ending December 31, 2006 of the cumulative total return from a $100 investment in the limited partner units of America First Apartment Investors, L.P. (the predecessor to the Company) on December 31, 2001 with the stocks listed on the S&P 500 and the Equity REIT Total Return index prepared by the National Association of Real Estate Investment Trusts (“NAREIT”). The Company had no operations of its own, and its shares did not trade in any public market, prior to its merger with America First Apartment Investors, L.P. on January 1, 2003. As a result of that merger, the Company issued one share for each outstanding limited partnership unit of America First Apartment Investors, L.P. The following assumes that the base share price for our common stock and each index is $100 and that all dividends are reinvested. The performance graph is not necessarily indicative of the Company’s future investment performance.


Total Return Analysis	12/31/2001		12/31/2002		12/31/2003		12/31/2004		12/31/2005		12/31/2006
America First Apartment Investors, Inc.	$	100/00	$	80.04	$	114.43	$	132.89	$	168.43	$	233.58
NAREIT Equity Index	$	100.00	$	103.82	$	142.37	$	187.33	$	210.11	$	283.77
S&P 500 Index	$	100.00	$	77.95	$	100.27	$	111.15	$	116.60	$	134.87

Source: CTA Integrated Communications www.ctaintegrated.com (303) 665-4200. Data from ReutersBridge Data Networks & National Association of Real Estate Investments Trusts.

(F) Sales of Unregistered Securities, None

(G) Repurchase of Securities, None


Item 6.	*Selected Financial Data.*

Set forth below is selected financial data for the Company for the five years ended December 31, 2006. Information for periods prior to January 1, 2003 represents the financial data of America First Apartment Investors, L.P. (the “Partnership”), which merged with the Company as of January 1, 2003. As a result of this merger, the Company assumed the assets, liabilities, and business operations of the Partnership. Information for the periods beginning June 3, 2004 includes the financial information of AFREZ which merged with the Company as of that date. The information should be read in conjunction with the Company’s consolidated financial statements and Notes thereto filed in response to Item 8 of this report.


	For the			For the			For the			For the			For the
	Year Ended			Year Ended			Year Ended			Year Ended			Year Ended
	Dec. 31, 2006			Dec. 31, 2005			Dec. 31, 2004			Dec. 31, 2003			Dec. 31, 2002
	(In thousands, except per share amounts)

Rental revenues	$	49,134		$	39,207		$	26,320		$	16,423		$	16,752
Other revenues		223			382			39			—			—
Real estate operating expenses		(21,208	)		(18,808	)		(14,488	)		(7,998	)		(8,400	)
Property management expenses(1)		(1,039	)		(799	)		(132	)		—			—
General and administrative expenses		(5,335	)		(5,656	)		(3,865	)		(1,910	)		(1,773	)
Depreciation expense		(10,436	)		(7,748	)		(4,951	)		(3,287	)		(3,344	)
In-place lease amortization		(1,728	)		(2,674	)		(2,130	)		—			—
Intangible asset impairment		(199	)		—			—			—			—
Contract termination costs(2)		—			(11,619	)		(5,911	)		—			—

Operating income (loss)		9,412			(7,715	)		(5,118	)		3,228			3,235
Interest and dividend income		1,995			1,725			1,252			328			306
Other non-operating gains (losses)(3)		(522	)		—			212			4,444			—
Interest expense		(11,231	)		(8,771	)		(5,140	)		(3,351	)		(3,292	)

Income (loss) from continuing operations		(346	)		(14,761	)		(8,794	)		4,649			249
Income (loss) from discontinued operations		706			1,107			56			(288	)		741
Gain on sales of discontinued operations		19,197			24,606			5,973			—			—

Net income (loss)	$	19,557		$	10,952		$	(2,765	)	$	4,361		$	990

Income (loss) from continuing operations per share or BUC (beneficial unit certificate), basic and diluted	$	(0.03	)	$	(1.40	)	$	(1.07	)	$	0.92		$	0.05

Net income (loss), basic and diluted, per share or BUC	$	1.77		$	1.04		$	(0.34	)	$	0.86		$	0.19

Dividends (distributions) declared per share or BUC	$	1.02		$	1.00		$	1.00		$	1.00		$	1.00

Investments in real estate, net of accumulated depreciation(4)	$	357,272		$	239,733		$	240,501		$	114,898		$	119,491

Total assets	$	385,764		$	333,959		$	297,397		$	166,892		$	136,854

Bonds and mortgage notes payable	$	249,651		$	185,764		$	167,150		$	82,215		$	82,913

Borrowings under repurchase agreements	$	12,825		$	36,202		$	27,875		$	33,012		$	—

Funds from Operations(5)	$	13,143		$	(1,422	)	$	970		$	9,362		$	5,954

Weighted average number of shares or BUCs outstanding — basic		11,037			10,513			8,243			5,074			5,023


(1)		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 amounts were not incurred until November 2004 when the Company internalized the property management function. Prior to that time, the Company paid property management fees to America First PM Group, Inc., a property management company that was an affiliate of the Advisor, and such fees were included in real estate operating expenses.

(2)		Contract termination charges result from the allocation of a portion of the consideration paid by the Company for the Advisor and America First PM Group, Inc, in 2005 and 2004, respectively to the termination of the pre-existing contractual relationships.

(3)		Other non-operating gains (losses) in 2006 include a $64,000 loss on redemption of securities, a $367,000 impairment of securities, and a $91,000 loss on redemption of debt. In 2004, other non-operating gains include a gain recognized upon the redemption of a corporate equity security. The 2003 amount represents a gain on a previously written off subordinated note that was realized from the sale of Jefferson Place Apartments.

(4)		In 2006, the Company sold Park at 58th, the Belvedere Apartments and Delta Crossing. Additionally, the Company has designated Cumberland Trace and Waters Edge as held for sale. These assets of $15,540 and $20,570 at December 31, 2006 and 2005 respectively are included in assets of discontinued operations in the consolidated balance sheets included within item 8, Financial Statements and Supplementary Data.

(5)		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 the 2006 computation, 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. FFO in 2005 and 2004 was negatively affected by $11.6 million and $5.9 million of costs associated with the conversion of the Company to a self-advised and self-managed REIT. Although these costs are required to be included within FFO, these types of expenses will not likely re-occur. For other items impacting comparability of FFO refer to the FFO discussion in Item 7, Management Discussion and Analysis of Financial Condition and Results of Operations.

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 associated with assets that are capitalized and then subsequently depreciated are added back to net income to calculate FFO.

The Company believes FFO is an important non-GAAP measure, as FFO excludes the depreciation expense on real estate assets that generally appreciate 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. FFO should not be considered as an alternative to net income which is calculated in accordance with Accounting Principals Generally Accepted in the United States of America (“GAAP”).

See the Funds from Operations caption included within item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a reconciliation of FFO to net income, which is calculated in accordance with GAAP.


Item 7.	*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 December 31, 2006:


					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		507		93	%
Arbors of Dublin	Dublin, OH		288			990		266		92	%
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		315		93	%
Cornerstone Apartments	Independence, MO		420			887		371		88	%
Covey at Fox Valley	Aurora, IL		216			948		205		95	%
Cumberland Trace(1)	Fayetteville, NC		248			958		201		81	%
Elliot’s Crossing Apartments	Tempe, AZ		247			717		230		93	%
Fox Hollow Apartments	High Point, NC		184			877		158		86	%
Greenbriar Apartments	Tulsa, OK		120			666		113		94	%
Highland Park Apartments	Columbus, OH		252			891		234		93	%
Huntsview Apartments	Greensboro, NC		240			875		220		92	%
Jackson Park Place Apartments	Fresno, CA		296			822		281		95	%
Jackson Park Place Apartments — Phase II	Fresno, CA		80			1,096		73		91	%
Lakes of Northdale Apartments	Tampa, FL		216			873		214		99	%
Littlestone of Village Green	Gallatin, TN		200			987		194		97	%
Misty Springs Apartments	Daytona Beach, FL		128			786		128		100	%
Monticello Apartments	Southfield, MI		106			1,027		94		89	%
Morganton Place	Fayetteville, NC		280			962		257		92	%
Oakhurst Apartments	Ocala, FL		214			790		211		99	%
Oakwell Farms Apartments	Nashville, TN		414			800		398		96	%
Shelby Heights	Bristol, TN		100			980		99		99	%
The Greenhouse	Omaha, NE		126			881		124		98	%
The Hunt Apartments	Oklahoma City, OK		216			693		210		97	%
The Park at Countryside	Port Orange, FL		120			720		118		98	%
The Ponds at Georgetown	Ann Arbor, MI		134			1,002		124		93	%
The Reserve at Wescott Plantation	Summerville, SC		192			1,083		180		94	%
Tregaron Oaks Apartments	Bellevue, NE		300			875		289		96	%
Village at Cliffdale	Fayetteville, NC		356			798		321		90	%
Waterman’s Crossing	Newport News, VA		260			944		254		98	%
Waters Edge Apartments(1)	Lake Villa, IL		108			814		101		94	%
Woodberry Apartments	Asheville, NC		168			837		163		97	%

			7,484			876		7,012		94	%

The Exchange at Palm Bay	Palm Bay, FL		72,007(2	)		n/a		69,193		96	%


(1)		Property is held for sale as of December 31, 2006.

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

Executive Summary

Fiscal 2006 was the Company’s first full year of operation as a self-advised and self-managed REIT. It also represented the completion of the first year of the Company’s four year strategic plan. The primary components of the plan include the divestiture of older, underperforming properties in markets with limited prospects for growth; the acquisition of newer and better located properties; increased Funds from Operations per share; and increased dividends.

To meet the provisions of the strategic plan, the Company accomplished the following during 2006:


	•	Eight properties were acquired, consisting of 1,966 units, for aggregate consideration of $145.7 million. The acquisitions were financed with approximately $72.1 million in cash, borrowings of an additional $72.0 million and the assumption of $1.6 million of liabilities. The cash for these transactions was primarily generated from the 2005 sale of St. Andrews at Westwood, the second quarter 2006 sale of the Belvedere Apartments and the release of cash collateralizing the bonds payable at Coral Point and Covey at Fox Valley.

	•	Two underperforming properties, Park at 58^th and Delta Crossing, were sold. In January 2007, a third underperforming property, Cumberland Trace, was sold for $10.9 million, with no gain or loss recognized on the sale. Cumberland Trace, acquired in September 2006, did not meet the Company’s acquisition criteria if bought on a stand alone basis, but was required to be purchased as it, Morganton Place, Village at Cliffdale and Woodberry Apartments were being sold only as a single portfolio.

	•	Reduced general and administrative expenses through benefits realized from the internalization of management. The elimination of administrative fees previously paid to our former external advisor reduced general and administrative expenses by approximately $1.6 million from the prior year. These savings are partially offset by approximately $600,000 of incremental costs. Such costs primarily relate to incremental salary costs to replace services formerly provided by the external advisor and incremental rental expenses for office space for those employees providing such services. Additionally the absence of property acquisition fees on the current year acquisitions created cash savings of $1.8 million. For the year, the Company estimates that it has saved approximately $2.8 million in cash and increased Funds from Operations by $0.10 per share by completing the management internalization.

	•	Dividends were increased by 4% to a dividend rate of $0.26 per share per quarter.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principals generally accepted in the United States of America (“GAAP”) requires management of the Company to make a number of judgments, assumptions and estimates. The application of these judgments, assumptions and estimates can affect the amounts of assets, liabilities, revenues and expenses reported by the Company. All of the Company’s significant accounting policies are described in Note 2 to the Company’s consolidated financial statements filed in response to Item 8 of this report. The Company considers the following to be its critical accounting policies as they involve judgments, assumptions and estimates that significantly affect the preparation of its consolidated financial statements.

Establishment of depreciation policy — The Company’s real estate assets are carried on the balance sheet at cost less accumulated depreciation. Depreciation of real estate is based on the estimated useful life of the related asset, generally 271/2 years on multifamily residential apartment buildings, 311/2 years on commercial buildings and five to fifteen years on capital improvements, and is calculated using the straight-line method. Depreciation of capital improvements on the Company’s commercial property is based on the term of the related tenant lease using the straight-line method. Shorter or longer depreciable lives and method of depreciation directly impact depreciation expense recorded in earnings.

Establishment of capitalization policy — Expenditures for purchases of a new asset with a useful life in excess of one year and for replacements and repairs that substantially extend the useful life, or improve the quality, of an asset are capitalized and depreciated over their useful lives. Recurring capital expenditures are typically incurred every year during the life of an apartment community and include such expenditures as carpet, vinyl flooring and appliances. Non-recurring capital expenditures are costs that are generally incurred in connection with a major project such as a roof replacement, parking lot resurfacing, siding replacement and exterior painting. Maintenance and repairs, such as landscaping maintenance, interior painting, and make ready costs are charged to expense as incurred. The determination of what constitutes an expenditure that substantially extends the life, or improves the quality of an asset, requires judgment and is not necessarily consistent with companies of similar type as there is diversity in such accounting policies adopted by the real estate industry.

Review of real estate assets for impairment — Management reviews each property for impairment whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. The review of recoverability is based upon comparing the net book value of each real estate property to the sum of its estimated undiscounted future cash flows. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value of the property exceeds its estimated fair value. The recognition of an impaired property and the potential impairment calculation are subject to a considerable degree of judgment, the results of which when applied under different conditions or assumptions could have a material impact on the financial statements. The estimated future cash flow of each property is subject to a significant amount of uncertainty in the estimation of future rental receipts, future rental expenses, and future capital expenditures. Such estimates are affected by economic factors such as the rental markets and labor markets in which the properties operate the current market values for properties in the rental markets, and tax and insurance expenses. Different conditions or different assumptions applied to the calculation may result in different results.

Results of Operations

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, 2005 and 2004, and those held for sale at December 31, 2006, as discontinued operations for all periods presented. Accordingly, the rental revenue, real estate operating expense, depreciation expense and interest expense on debt collateralized by these properties and any other property specific components of net income are not reflected in our results of continuing operations in any periods presented.

Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005 (in thousands):


	For the Year Ended		For the Year Ended			Dollar			Percentage
	December 31, 2006		December 31, 2005			Change			Change

Revenues:
Rental revenues	$	49,134	$	39,207		$	9,927			25	%
Other		223		382			(159	)		(42	)%

Total revenues		49,357		39,589			9,768			25	%

Expenses:
Real estate operating		21,208		18,808			2,400			13	%
Property management		1,039		799			240			30	%
General and administrative		5,335		5,656			(321	)		(6	)%
Depreciation		10,436		7,748			2,688			35	%
In-place lease amortization		1,728		2,674			(946	)		(35	)%
Intangible asset impairment		199		—			199			—
Contract termination costs		—		11,619			(11,619	)		(100	)%

Total expenses		39,945		47,304			(7,359	)		(16	)%

Operating income (loss)	$	9,412	$	(7,715	)	$	17,127			222	%

Rental revenues. Rental revenues increased by $9.9 million, or 25% from the year ended December 31, 2005. Same store (properties owned for the entirety of both periods presented) revenues increased 5% or $1.9 million from the prior year. The increased same store revenues are a result of improved market conditions primarily being driven by increased demand. Demand for apartments has increased due to continued job growth, reduced affordability of home ownership and modest supply of new apartments due to higher land and construction costs. Additionally, the supply of rental apartments, in certain of the Company’s markets has decreased due to the conversion of multifamily apartment properties to condominiums. Full year ownership of Tregaron Oaks and Reserve at Wescott, both acquired in the third quarter of 2005, increased revenues by $2.7 million. The 2006 acquisitions of The Greenhouse, Arbors of Dublin, Jackson Park Place-Phase II, Morganton Place, Village at Cliffdale, the Woodberry Apartments and the Cornerstone Apartments (collectively, the “2006 Acquisitions”) increased revenues by $5.3 million.

Other revenues. Other revenues consist primarily of fees earned from the management of properties owned by unrelated third parties. These revenues decreased during 2006 as the Company is managing fewer properties in 2006 than in 2005. As of December 31, 2006, the Company only provides third party management services at two properties. As of December 31, 2005, the Company was providing such services at five properties.

Real estate operating expenses. Real estate operating expenses are comprised principally of real estate taxes, property insurance, utilities, repairs and maintenance, and salaries and related employee expenses of on-site employees. The 2006 Acquisitions increased operating expenses by $2.3 million. Incremental operating expenses incurred as a result of a full year of ownership of Tregaron Oaks and Reserve at Wescott Plantation are mostly offset by reduced operating costs at the Company’s same store properties. These costs decreased due to reduced market ready costs, reduced utility expenses as a result of the Company passing on more utility costs to tenants, and a successful tax appeal at one of the Company’s properties which reduced 2006 property taxes by approximately $100,000.

Property management expenses. Property management expenses consist of salaries and benefits of the Company’s regional property managers, national maintenance director and senior vice-president of operations, their respective travel costs and other costs directly attributable to these personnel. The majority of the increase is a result of the creation of a national training program, and the costs of development. The remaining increase is due to the addition of a regional manager for the Florida properties and increased travel by all regional directors.

General and administrative expenses. General and administrative expenses decreased by $321,000 from the prior year. The elimination of administrative fees paid to the former external advisor reduced general and administrative expenses by $1.6 million. Salary costs increased by approximately $470,000 from the prior year. This increase is primarily a result of hiring additional personnel to replace the services formerly provided by the Advisor, and increased compensation provided to certain executives based upon the current year results. The Company has also incurred approximately $145,000 of other general and administrative costs as a result of separating from the Advisor. These costs primarily resulted from increased rent expense for office space for individuals hired to replace the services formerly provided by the Advisor. Fees paid to our Board of Directors increased by approximately $250,000. This increase resulted primarily from a stock option grant made to the entire Board in August and a bonus payment made to the Company’s Chairman in December. The remaining increase is primarily attributable to increased professional fees of $390,000 associated with hiring professional service firms to serve as financial advisors and to assist in the evaluation of the Company’s compensation programs.

Depreciation expense. The 2006 Acquisitions and full year ownership of Tregaron and Reserve at Wescott increased depreciation expense by $2.3 million. Same store deprecation expense increased by approximately $300,000. This increase is primarily due to the impact of capital expenditures.

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 decreased in 2006, as the in-place leases obtained in the 2004 merger with AFREZ became fully amortized in May of 2005. The decrease resulting from the complete amortization of the AFREZ leases more than offset the additional amortization expense from in-place leases acquired in the 2006 Acquisitions.

Intangible asset impairment. 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 apartment 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 several of the other properties for which it provided 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 recorded a charge of $199,000.

Contract termination costs. On December 30, 2005, the Company acquired the Company’s external advisor through a merger. Prior to the merger, the advisor provided management and advisory services to the Company. As a result of the Company’s pre-existing relationship with the advisor, $11.6 million of the $11.8 million total merger consideration was required to be allocated to the termination of the pre-existing contractual relationship and was expensed in 2005.

Other income and expenses

The following table sets forth the components of other income and expenses (in thousands):


	For the Year Ended			For the Year Ended			Dollar			Percentage
	December 31, 2006			December 31, 2005			Change			Change

Interest and dividend income	$	1,995		$	1,725		$	270			16	%
Loss on redemption of securities		(64	)		—			(64	)		—
Impairment of securities		(367	)		—			(367	)		—
Loss on extinguishment of debt		(91	)		—			(91	)		—
Interest expense		(11,231	)		(8,771	)		(2,460	)		28	%

Other expense, net	$	(9,758	)	$	(7,046	)	$	(2,712	)		38	%

Interest and dividend income increased from 2005 due to the interest income earned on $29.3 million of the cash proceeds from the November 16, 2005 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, which was not reinvested until September 28, 2006. Additionally, until September 28, 2006, the Company had approximately $16.9 million of cash invested in interest bearing accounts, which served as additional collateral for tax-exempt bonds issued to finance Coral Point Apartments and the Covey at Fox Valley. 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 agency securities was sold.

Interest expense represents interest paid and other expenses associated with the taxable and tax-exempt mortgage debt incurred to finance the Company’s investments in multifamily apartment properties. The acquisitions of Tregaron Oaks and The Reserve at Wescott Plantation increased interest expense by approximately $870,000 compared to the year ended December 31, 2005. The 2006 Acquisitions increased interest expense by $595,000. The adjustment of the Company’s interest rate swaps to current market value accounted for $264,000 of the increase in interest expense. During 2005, the market value of its interest rate swaps increased, which in turn reduced interest expense by $85,000, whereas in the current year, the market valued decreased, which increased interest expense by $179,000. Increased interest rates on the Company’s repurchase agreement borrowings and subordinated notes increased interest expense by $340,000. The remaining increase is due to the Company’s 2005 allocation of interest expense to St. Andrews, Park Trace, and The Retreat, in accordance with Emerging Issue Task Force Issue No. 87-24, Allocation of Interest to Discontinued Operations. Under the terms of this consensus, the Company was required to allocate interest expense to discontinued operations for the three properties which collateralized debt issued by other of the Company’s properties. These properties were sold in the second half of 2005. Since the Company utilized the proceeds from the sales to purchase additional multifamily properties, rather

than repay a portion of the collateralized debt, interest expense associated with continuing operations increased. The loss on extinguishment of debt occurred as a result of the Company’s refunding of the Covey at Fox Valley bonds. The loss consists of unamortized deferred financing costs and legal fees associated with the transaction.

Discontinued operations. During 2006, the Company sold the Belvedere Apartments, the Park at 58^th Apartments, and Delta Crossing. The results of operations and the gain on the sale of these properties are classified as discontinued operations in the Consolidated Statements of Operations and Comprehensive Income (Loss). The sales of these three properties resulted in a gain of $19.2 million. Additionally, the Company has designated Cumberland Trace and Waters Edge as held for sale pursuant to SFAS No. 144. The divestiture of Cumberland Trace was completed on January 31, 2007 for $10.9 million. Waters Edge is not currently under contract, but the Company is currently marketing the property to prospective buyers and it expects the property will be divested within the next 12 months. During 2005, the Company sold the Park Trace Apartments, The Retreat Apartments and the St. Andrews at Westwood Apartments for a gain of $24.6 million.

Revenues, operating expenses, and other expenses, all decreased from 2005 to 2006 due to the number of properties which comprised discontinued operations for each period. During 2006 five properties were included within discontinued operations; in 2005 there were eight properties.

Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004 (in thousands):


	For the Year Ended			For the Year Ended			Dollar			Percentage
	December 31, 2005			December 31, 2004			Change			Change

Revenues:
Rental revenues	$	39,207		$	26,320		$	12,887			49	%
Other		382			39			343			—

Total revenues		39,589			26,359			13,230			50	%

Expenses:
Real estate operating		18,808			14,488			4,320			30	%
Property management		799			132			667			—
General and administrative		5,656			3,865			1,791			46	%
Depreciation		7,748			4,951			2,797			56	%
In-place lease amortization		2,674			2,130			544			26	%
Contract termination costs		11,619			5,911			5,708			97	%

Total expenses		47,304			31,477			15,827			50	%

Operating loss	$	(7,715	)	$	(5,118	)	$	(2,597	)		51	%

Rental revenues. The June 2004 merger with AFREZ increased rental revenues by $7.3 million, due to twelve months of ownership in 2005 as compared to seven months of ownership in 2004. The acquisitions of Arbor Hills in December 2004, Tregaron Oaks in August 2005, and The Reserve at Wescott Plantation in September 2005 (collectively the “2005 Acquisitions”), increased rental revenues by $5.2 million. The remaining revenue growth is attributable to increased occupancy and reduced concessions at those properties owned for the two years ended December 31, 2005.

Other revenues. Other revenues include fees earned from the management of properties owned by unrelated third parties. Prior to the November 2004 acquisition of property management agreements from America First Properties Management Companies, LLC, (“America First Properties”) the Company did not provide any such services.

of the property management fees, which were $1.3 million in 2004. These fees were eliminated due to the internalization of property management functions in November 2004. Fiscal 2004 results were also negatively impacted by hurricane related expenses of $257,000 at several of the Company’s properties.

Property management expenses. Property management expenses consist of salaries and benefits of the Company’s regional property managers, national maintenance director and senior vice-president of operations, their respective travel costs and other costs directly attributable to these personnel. Such costs were not incurred until November 2004, when the Company acquired assets from America First Properties and began providing their own property management services.

General and administrative expenses. General and administrative expenses increased by $1.8 million from the prior year. Salaries and benefits increased by approximately $830,000 primarily due to severance payments made to the former Chief Investment Officer and the incremental costs incurred as a result of hiring additional personnel necessary to replace the support services of Company’s former management company. Administrative fees paid to the Company’s former advisor increased by approximately $420,000 due to the 2005 Acquisitions and the AFREZ merger. The Company also incurred approximately $200,000 of professional fees as it utilized the services of an executive recruiter to hire selected management personnel. The remainder of the increase is primarily attributable to increased legal and accounting fees and directors and officers insurance costs.

Depreciation expense. The increase in depreciation expense of $2.8 million is attributable to the acquisition of properties in the merger with AFREZ and the purchase of the 2005 Acquisitions. Depreciation expense incurred by the properties held by the Company prior to the merger with AFREZ was consistent with the depreciation expense incurred in 2004.

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. The 2005 Acquisitions increased such expenses by $343,000. The remaining increase is due to increased amortization expense from the AFREZ merger.

Contract termination costs. On December 30, 2005, the Company acquired the Advisor through a merger. Prior to the merger, the Advisor provided management and advisory services to the Company. As a result of the Company’s pre-existing relationship with the Advisor, $11.6 million of the $11.8 million total merger consideration was required to be allocated to the termination of the pre-existing contractual relationship and was expensed in the current year.

In November 2004, the Company acquired certain property management assets, rights to use certain proprietary systems, certain property management agreements, certain employment agreements and other intangible assets from America First Properties Management Companies, LLC. Of the $6.8 million acquisition price, $5.9 million was expensed as an allocation of the acquisition price to the termination of the existing property management relationship on the Company’s properties. The Company estimates that the property management acquisition resulted in incremental earnings of approximately $800,000 in 2005.

Other income and expenses

The following table sets forth the components of other income and expenses (in thousands):


	For the Year Ended			For the Year Ended			Dollar			Percentage
	December 31, 2005			December 31, 2004			Change			Change

Interest and dividend income	$	1,725		$	1,252		$	473			38	%
Gain on redemption of securities		—			212			(212	)		—
Interest expense		(8,771	)		(5,140	)		(3,631	)		71	%

Other expense, net	$	(7,046	)	$	(3,676	)	$	(3,370	)		92	%

Interest and dividend income. The increased interest and dividend income is primarily due to $7.4 million loan made to America First Communities Offutt Developers, LLC (the “Developer”), in September 2005. These

funds were used by the Developer to partially finance the military housing privatization project at Offutt Air Force Base in Bellevue, Nebraska. Interest is paid at a variable rate based upon the 30 day LIBOR rate plus 9%. During 2005, the Company recognized $286,000 of interest income from this loan. Also increasing interest income is the interest earned on restricted cash. At December 31, 2005, the Company had $53.3 million of restricted cash. Approximately $29.4 million of the restricted cash resulted from a portion of the proceeds from the sale of St. Andrews at Westwood being placed in a segregated account for purposes of acquiring additional properties in transactions that qualify for the deferral of gain recognition under Section 1031 of the Internal Revenue Code. Additionally, as a result of the divestitures of The Retreat and Park Trace, the Company had to utilize $16.9 million of cash to serve as replacement collateral for mortgage notes which were previously collateralized by these properties. In aggregate, these restricted funds generated $275,000 of interest income. Offsetting these increases was reduced interest income on unrestricted cash and cash equivalents, due to reduced levels of unrestricted cash during 2005.

Interest expense. Interest expense increased by $3.6 million from 2004 to 2005. Approximately $2.8 million of the increase is due to the debt assumed in the AFREZ merger and to finance the acquisitions of the 2005 Acquisitions. Interest expense also increased by $300,000 due to increased repurchase agreement borrowings and higher interest rates on such borrowings. Also contributing to increased interest expense was the valuation of the Company’s interest rate swaps. In 2004, these swaps reduced interest expense by $273,000. In 2005, the swaps decreased interest expense by $85,000, a change of $188,000. The remaining increase is due to higher interest rates on the Company’s variable rate mortgage notes and bonds.

Discontinued operations. During 2005, the Company divested the Park Trace Apartments, The Retreat Apartments, and St. Andrews at Westwood. In connection with these sales, the Company received cash proceeds of $54.4 million, net of closing costs of $1.1 million. These proceeds were partially utilized by the Company to finance the acquisitions of Tregaron Oaks, the Reserve at Wescott Plantation, and the January 2006 acquisition of The Greenhouse. In aggregate, the Company recognized a gain on the sale of these properties of $24.6 million.

In December 2004, the Company sold The Glades Apartments. The Glades Apartments was sold for a total sales price of $20.0 million which consisted of cash and debt assumed by the buyer. The net cash proceeds to the Company were approximately $11.1 million, net of closing costs of approximately $149,000. A gain on the sale of this property was realized in the amount of $6.0 million.

Revenues, operating expenses, and other expenses, all decreased from 2004 to 2005 due to the number of properties which comprised discontinued operations for each period. During 2005 eight properties were included within discontinued operations; in 2004 there were nine 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 Year Ended December 31,
	2006			2005			2004

Net income (loss)	$	19,557		$	10,952		$	(2,765	)
Depreciation expense		10,248			7,748			4,951
In-place lease amortization		1,728			2,674			2,130
Depreciation and amortization of discontinued operations		376			1,810			2,839
(Gain) loss on redemption of securities		64			—			(212	)
Impairment of securities		367			—			—
Less: Gain on sales of discontinued operations		(19,197	)		(24,606	)		(5,973	)

Funds from Operations	$	13,143		$	(1,422	)	$	970

Basic weighted average shares outstanding		11,037			10,513			8,243

Funds from Operations per share	$	1.19		$	(0.14	)	$	0.12

The Company’s FFO increased by $14.6 million for the year ended December 31, 2006 compared to the prior year. FFO during 2005 was negatively affected by a contract termination charge of $11.6 million described below. No such charge was recorded in 2006 and this accounted for the majority of the increase in 2006 FFO over 2005 FFO. Approximately $1.0 million of the remaining $3.0 million increase is attributable to the benefit the Company experienced from the internalization of the Advisor. The remaining increase is largely attributable to improved same store operations. While the current year acquisitions, net of divestitures generated positive FFO, these gains were offset by increased interest expense and increases in certain general and administrative expenses.

The Company’s FFO decreased $2.4 million for the year ended 2005 compared to the prior year. The reduction in 2005 is a result of the contract termination charge of $11.6 million recognized in connection with the merger of the Advisor. During 2004, the Company recognized a contract termination charge of $5.9 million related to the acquisition of certain assets from America First Properties Management Company. The additional contract termination charge incurred in 2005 was partially offset by additional FFO generated from holding the former AFREZ properties for a full year in 2005; the benefit of the 2005 Acquisitions; same store revenue growth of approximately $900,000; and approximately $800,000 in savings generated from the property management asset acquisition. FFO, prior to considering the contract termination charges was $10.2 million, or $0.97 per share, and $6.9 million, or $0.84 per share, in 2005 and 2004 respectively.

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 associated with assets that are capitalized and then subsequently 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.

Supplemental Operating Performance Statistics

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 annual 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. Average annual same store rent per unit is calculated as the same store rental revenue divided by the number of units at same store properties without adjustment for changes in occupancy levels.

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.

In previous filings, the Company indicated that economic occupancy was also a high level measure used to gauge the performance of the portfolio. In the third quarter of 2006, the Company instituted a change in pricing methodology which will eliminate the majority of the monthly-recurring concessions granted to tenants. The change in methodology is in anticipation of the potential future implementation of a rent optimization software program. The elimination of the majority of recurring concessions will not impact net rental revenues, but will significantly reduce the spread between the economic and physical occupancy percentages. At most properties, economic occupancy will be within one or two percentage points of the physical occupancy. Accordingly, the economic occupancy metric will no longer provide valuable insight into the Company’s performance.

The following table presents these measures as for the years ended:


	December 31,			December 31,			December 31,
	2006			2005			2004

Physical Occupancy		94	%		93	%		92	%
Average annual same store rent per unit(1)	$	8,038		$	7,643			n/a
Net operating income margin(2)		57	%		52	%		45	%


(1)		Fiscal 2004 average same store rent per unit is not disclosed, as the same store information for the period from January 1, 2004 through December 31, 2006 is not as relevant due to the significant impact that the AFREZ merger had on the Company.

(2)		Net operating income margin has increased largely due to the elimination of property management fees in November 2004 as a result of the acquisition of certain assets from America First Property Management Companies, LLC, the acquisition of properties which allow the Company to realize improved margins, and strong same store revenue growth.

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


	For the Year Ended			For the Year Ended
Physical Occupancy	December 31,			December 31,
Property Name	2006			2005

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

		95	%		94	%
Fiscal 2006 acquisitions
Arbors of Dublin		92	%		—
Cornerstone Apartments		88	%		—
Jackson Park Place Apartments — Phase II		91	%		—
Morganton Place		92	%		—
The Greenhouse		98	%		—
Village at Cliffdale		90	%		—
Woodberry Apartments		97	%		—
Properties held for sale or sold in 2006
Belvedere Apartments		—			99	%
Cumberland Trace		81	%		—
Delta Crossing		—			96	%
Park at 58th		—			76	%
Waters Edge Apartments		94	%		88	%

		94	%		93	%

Annual Rental Revenue per unit


	For the Year		For the Year
	Ended		Ended
	December 31,		December 31,
Property Name	2006		2005		Change			% Change

Same store properties
Arbor Hills	$	6,836	$	6,750	$	86			1	%
Bluff Ridge Apartments		8,217		7,842		375			5	%
Brentwood Oaks Apartments		8,454		8,133		321			4	%
Coral Point Apartments		7,143		6,537		606			9	%
Covey at Fox Valley		10,158		9,391		767			8	%
Elliot’s Crossing Apartments		7,673		6,816		857			13	%
Fox Hollow Apartments		6,255		5,996		259			4	%
Greenbriar Apartments		6,019		5,859		160			3	%
Highland Park Apartments		6,406		6,436		(30	)		0	%
Huntsview Apartments		6,748		6,513		235			4	%
Jackson Park Place Apartments		8,897		8,329		568			7	%
Lakes of Northdale Apartments		9,397		8,563		834			10	%
Littlestone of Village Green		7,426		7,163		263			4	%
Misty Springs Apartments		8,504		8,005		499			6	%
Monticello Apartments		9,760		10,110		(350	)		(3	)%
Oakhurst Apartments		8,249		7,991		258			3	%
Oakwell Farms Apartments		7,094		6,736		358			5	%
Shelby Heights		7,289		6,692		597			9	%
The Hunt Apartments		6,182		5,810		372			6	%
The Park at Countryside		8,549		8,050		499			6	%
The Ponds at Georgetown		11,090		10,640		450			4	%
Waterman’s Crossing		10,491		9,789		702			7	%

Average	$	8,038	$	7,643	$	395			5	%

Fiscal 2006 acquisitions(1)
Arbors of Dublin	$	5,950
Cornerstone Apartments		250
Jackson Park Place Apartments — Phase II		4,964
Morganton Place		2,090
The Greenhouse		12,022
Village at Cliffdale		1,957
Woodberry Apartments		2,131

Average	$	4,195

Properties held for sale or sold in 2006(1)
Belvedere Apartments	$	4,128	$	9,770
Cumberland Trace		1,658		—
Delta Crossing		5,959		6,817
Park at 58th		1,665		4,994
Waters Edge Apartments		9,807		9,362

Average	$	4,643	$	7,736


	For the Year		For the Year
	Ended		Ended
	December 31,		December 31,
Property Name	2006		2005		Change	% Change

Fiscal 2005 acquisitions and divestitures(1)
The Reserve at Wescott Plantation	$	9,487	$	3,298
Tregaron Oaks Apartments		8,457		3,273
Park Trace Apartments		—		4,297
St. Andrews Apartments		—		7,536
The Retreat Apartments		—		5,565

Average	$	8,972	$	4,794


(1)		Rent per unit represents revenue earned by the Company during the period of ownership. Such amounts are not indicative of the full year revenues per unit.

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 mortgages payable; (iv) acquire additional multifamily apartments and other investments and (v) pay dividends. The Company expects to be able to fund dividends from cash generated from operating activities.

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

In addition to the funds that the Company may raise through the issuance of additional equity capital, it may also be able to borrow money to finance the acquisition of additional real estate assets. Borrowing to acquire additional multifamily apartment properties is in the form of long-term taxable or tax exempt mortgage loans secured by the acquired properties. In the third quarter of 2006, the Company entered into a Master Credit Facility and Reimbursement Agreement (the “Facility”) with Wells Fargo Bank, N.A. and Fannie Mae. The Facility was initially established for $70.5 million and may be expanded with the consent of the lenders. The Facility provides the Company the ability to borrow at either fixed or variable interest rates and also enables the Company to utilize Fannie Mae credit enhancement on tax exempt bond financings on its existing portfolio or for future property acquisitions. Upon closing of the Facility, the Company borrowed $37.6 million to finance the acquisition of Morganton Place, Village of Cliffdale, and Woodberry. 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.

As of December 31, 2006, the Company had $63.1 million and $23.1 million in fixed and variable rate borrowings, respectively, under the Facility. The Facility also provides 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. These borrowings have a term of ten years from the date of the transaction.

The Facility contains representations, warranties, terms and conditions customary for transactions of this type with Fannie Mae. These include covenants limiting the Company’s subsidiary borrowers’ ability to (1) transfer ownership interests in the subsidiary borrowers or in the real estate mortgaged as collateral for the Facility, (2) enter into certain transactions with affiliates, (3) make distributions to the Company during the continuation of a Potential Event of Default or an Event of Default (as those terms are defined in the Facility), and (4) initiate any public process or make public application to convert any of the mortgaged properties to a condominium or cooperative.

The Facility also contains financial covenants that require the Company to maintain at all times (a) a Net Worth (defined as total stockholders’ equity plus accumulated depreciation) of not less than $100 million, (b) cash and cash equivalents (as defined in the Facility) of not less than $3 million, and (c) a total balance of cash, cash equivalents and investments in publicly-traded common or preferred stock of not less than $4 million. The Company is in compliance with such covenants.

The Facility contains certain events of default, including (1) failure to pay principal, interest or any other amount owing on any other obligation under the Facility when due, (2) material incorrectness of representations and warranties when made, (3) breach of covenants, (4) failure to comply with requirements of any Governmental Authority (as defined in the Facility) beyond specified cure periods, (5) bankruptcy and insolvency and (6) entry by a court of one or more judgments against the borrowers or the Company in the aggregate amount in excess of $250,000 that remain unbonded, undischarged or unstayed for a certain number of days after the entry thereof. If any event of default occurs and is not cured within applicable grace periods set forth in the Facility or waived, all loans and other obligations could become due and immediately payable and the Facility could be terminated.

The multifamily apartment properties which the Company currently owns are financed under 22 financings, with an aggregate principal balance of $249.7 million as of December 31, 2006. These financings consist of twelve tax-exempt bonds with an aggregate principal balance outstanding of approximately $111.8 million and nine taxable mortgage notes payable with a combined principal balance of approximately $129.0 million (including the company’s obligations under the Facility). Approximately 78% of these obligations bear interest at a fixed rate with a weighted average interest rate of 5.12% per annum for the year ended December 31, 2006. The remaining 22% of these obligations bear interest at variable rates that had a weighted average interest rate of 3.87% per annum, including the effect of interest rate swaps, for the year ended December 31, 2006. Maturity dates on these obligations range from December 2007 to November 2044. The final financing relates to an $8.9 million short-term loan undertaken to finance the acquisition of Cumberland Trace. This short-term loan was repaid on January 31, 2007, in connection with the sale of this property.

In addition, the Company has borrowings in the form of Notes payable of $2.4 million at December 31, 2006. The Notes payable, which were assumed as part of the merger with AFREZ, bear interest at a variable rate with a weighted average interest rate of 5.84% for the year ended December 31, 2006. On January 15, 2007, the Company redeemed the notes for a price equal to 100% of the outstanding principal balance of the notes together with accrued interest to the date fixed for redemption. The Company was required to redeem the notes, as under the terms of the indenture, 80% of the net proceeds from sale of Delta Crossing were required to be utilized to prepay the notes.

The Company also has short term borrowings under repurchase agreements of $12.8 million at December 31, 2006 that bear interest at fixed rates with a weighted average interest rate of 5.33% for the year ended December 31, 2006 and mature within one year. Repurchase agreements are utilized by the Company to meet short term working capital needs, to finance certain investments, such as agency securities or mezzanine-level financings and, in 2005, to finance a portion of the cash consideration paid in the acquisition of the Advisor.

Repurchase agreements take the form of a sale of a security to a counterparty at an agreed upon price in return for the counterparty’s simultaneous agreement to resell the same securities back to the owner at a future date at a higher price. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a borrowing under which the Company pledges agency securities that it already owns as collateral to secure a short-term loan with a counterparty. The borrowings are then used to acquire agency securities, which themselves may be used as collateral for additional borrowings under repurchase agreements. The difference between the sale and

repurchase price is the cost, or interest expense, of borrowing under the repurchase agreements. The repurchase agreements may require the Company to pledge additional assets to the lender in the event the market value of existing pledged collateral declines below a specified percentage. The pledged collateral may fluctuate in value due to, among other things, principal repayments, market changes in interest rates and credit quality. The Company retains beneficial ownership of the pledged collateral, including the right to distributions, while the counterparty maintains custody of the collateral securities. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receive back its pledged collateral from the lender or, may renew the repurchase agreement at the then prevailing financing rate.

To finance the 2005 loan made to the Developer which partially financed the military housing privatization project at Offutt Air Force Base and the Advisor acquisition, the Company utilized repurchase agreements collateralized by GNMA securities of certain 100% owned properties. Other than the collateral, the terms of these repurchase agreements are similar to those described above.

The January 25, 2007 borrowing under the Facility was utilized by the Company to repay $7.9 million of the $12.8 million outstanding repurchase agreements. This transaction allows the Company to fix the interest rates on formerly revolving borrowings at a rate which is comparable to the current variable rates being paid on this debt. The remaining proceeds were utilized to repay the $2.4 million of Notes payable outstanding.

The Company may use derivatives and other hedging strategies to help mitigate interest rate risks on the long-term borrowings used to finance its properties and the prepayment and interest rate risks on its agency securities. The Company may use interest rate caps, interest rate swaps or other derivative instruments to achieve these goals, but the timing and amount of hedging transactions, if any, will depend on numerous market conditions, including, but not limited to, the interest rate environment, management’s assessment of the future changes in interest rates and the market availability and cost of entering into such hedge transactions. In addition, management’s ability to employ hedging strategies may be restricted by requirements for maintaining REIT status. It is against Management policy to enter into derivatives for speculative or trading purposes.

Cash provided by operating activities for the year ended December 31, 2006 increased by $4.7 million compared to the same period a year earlier due to increased operating income generated by the 2006 acquisitions and the same store properties and the absence of contract termination charges.

In 2006, $43.0 million of cash was used for investing activities. The Company utilized approximately $144.1 million to acquire the Greenhouse, Arbors of Dublin, Jackson Park Place- Phase II, Cumberland Trace, Morganton Place, Woodberry Apartments, Village at Cliffdale and the Cornerstone Apartments. These acquisitions were partially financed with $34.9 million in proceeds from the sale of Park at 58th, Belvedere Apartments, and Delta Crossing, and the release of restricted cash. The restricted cash was generated in 2005 through the placement of $29.3 million of the proceeds from the sale of St. Andrews in a Section 1031 exchange account. The use of this account allows the Company, upon meeting certain conditions, to defer the majority of the taxable gain from the sale. Restricted cash was also generated in 2005 as result of the sale of Park Trace and The Retreat. Prior to their sales, these properties collateralized bonds payable. When Park Trace and The Retreat were sold, the Company utilized $16.6 million of cash from the sales as replacement collateral for those bonds. The Company was able to access all but $1.8 million of the cash collateral in 2006 through the placement of Covey at Fox Valley into the credit facility and substitution of Jackson Park Place-Phase II as collateral for the Coral Point debt.

The Company also generated $18.0 million of cash through the principal repayment and sale of its agency security portfolio and $7.1 million from the prepayment of the mezzanine loan made by the Company to the developer of a military housing project at Offutt AFB.

Financing activities provided $27.9 million of cash in 2006. The Company issued $72.0 million of mortgage notes to finance approximately 50% of the cost of the 2006 acquisitions. Cash from financing activities was utilized to pay $11.2 million in dividends and dividend equivalents and to repay $23.4 million of borrowings under repurchase agreements. An additional $8.1 million of cash was utilized to make principal payments on bonds and mortgage notes. Lastly, approximately $1.5 million of cash was utilized to pay up-front costs incurred in connection with mortgages issued during 2006. These costs will be amortized over the respective life of the mortgages.

Off Balance Sheet Arrangements

As of December 31, 2006 and 2005, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, the Company does not engage in trading activities involving non-exchange traded contracts. As such, the Company is not materially exposed to any financing, liquidity, market, or credit risk that could arise if it had engaged in such relationships. The Company does not have any relationships or transactions with persons or entities that derive benefits from their non-independent relationships with the Company or its related parties other than what is disclosed in Note 14 to the Company’s consolidated financial statements.

Contractual Obligations

The Company had the following contractual obligations as of December 31, 2006 (in thousands):


	Payments Due by Period
			Less Than		2-3		4-5		More Than
	Total		1 Year		Years		Years		5 Years

Notes payable	$	2,413	$	—	$	2,413	$	—	$	—
Bonds and mortgage notes payable		249,651		15,354		13,611		11,998		208,688
Borrowings under repurchase agreements		12,825		12,825		—		—		—

Total	$	264,889	$	28,179	$	16,024	$	11,998	$	208,688

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 December 31, 2006 was approximately 5.12% for fixed-rate debt and 3.87% for variable-rate debt.

In January 2007, the Company repaid $7.9 million of the repurchase agreements as they came due. The remaining $4.9 million will either be paid down or renewed with repurchase agreements having similar terms, although interest rates may continue to increase. Additionally, the Company redeemed the $2.4 million of Notes payable. These transactions were funded through $10.0 million of additional borrowings under the Facility. These borrowings require monthly payments of interest for the next five years, and payments of principal and interest in years six through ten.

Inflation

Substantially all of the resident leases at the Company’s multifamily apartment properties allow, at the time of renewal, for adjustments in the rent payable, and thus may enable the Company to seek rent increases. The short-term nature of these leases, substantially all of which have terms of one year or less, serves to reduce the risk to the Company of the adverse effects of inflation; however, market conditions may prevent the Company from increasing rental rates in amounts sufficient to offset higher operating expenses.

Recent 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 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 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.

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 September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, (“SAB 108”) to address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108, effective for the Company’s fiscal year ended December 31, 2006, provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The adoption of SAB 108 did not have an impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. SFAS 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 159 does not affect existing accounting requirements for certain assets and liabilities to be carried at fair value. SFAS 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 159, and has not yet determined the impact on its consolidated financial statements.


Item 7A.	*Quantitative and Qualitative Disclosures about Market Risk.*

The Company’s primary market risk exposure is interest rate risk on its borrowings, credit risks of cash concentrations and credit risks on its interest rate swap and cap agreements. Each of their risks is discussed below.

Interest Rate Risk on Bonds and Mortgage Notes Payable

The Company’s exposure to market risk for changes in interest rates relates primarily to its variable rate long-term borrowings and its repurchase agreements. 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 objectives, the Company borrows primarily at fixed rates and also enters into derivative financial instruments, such as interest rate swaps and caps, in order to manage its variable interest rate risk. The Company has not entered into derivative instrument transactions for speculative purposes.

At December 31, 2006, the Company had approximately $12.8 million in repurchase agreement borrowings, with a weighted average interest rate of 5.33%. Variation in interest rates affect the Company’s cost of borrowings on these agreements. Had average interest rates on the Company’s repurchase agreement borrowings increased or decreased by 100 basis points during the year ended December 31, 2006, interest expense on the repurchase agreements would have increased or decreased by approximately $128,000.

As of December 31, 2006, approximately 78% of the Company’s long-term borrowings consisted of fixed-rate financing. The remaining 22% consisted of variable-rate financing. Variations in interest rates affect the Company’s cost of borrowing on its variable-rate financing. The interest rates payable by the Company on these obligations increase or decrease with certain index interest rates. If the Company’s borrowing costs increase, the amount of cash available for distribution to shareholders will decrease. Had the average index rates increased or decreased by 100 basis points during the year ended December 31, 2006, interest expense on the Company’s variable-rate debt financing would have increased or decreased by approximately $460,000.

The following table presents information about the Company’s financial instruments that are sensitive to changes in interest rates, including principal amounts and weighted average interest rates by year of maturity for the Company’s bonds and mortgage payable (in thousands):


Fixed-Rate Borrowings						Variable-Rate Borrowings
			Weighted							Weighted
	Principal		Average					Principal		Average
Maturity	Amount		Interest Rate			Maturity		Amount		Interest Rate(1)

2007	$	1,085		6.01	%		2007	$	14,269		4.09	%
2008		1,151		6.01	%		2008		129		4.09	%
2009		12,192		6.84	%		2009		139		4.09	%
2010		1,014		5.77	%		2010		4,564		4.09	%
2011		6,420		6.72	%		2011		—		—
Thereafter		172,929		4.93	%		Thereafter		35,759		3.76	%

	$	194,791						$	54,860


(1)		Weighted average rate for the year ended December 31, 2006.

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. As of December 31, 2006, notional amounts and terms are as follows (dollars in thousands):


	Interest Rate Swaps and Caps
		Counterparty						Company
		Notional			Receive/			Notional			Pay
	Maturity	Amount			Cap Rate			Amount			Rate

Fixed to Variable	September 20, 2007	$	5,300	(4)		7.13	%	$	5,300	(4)		4.09	%(3)
Fixed to Variable	December 6, 2007	$	4,950	(1)(4)		7.75	%	$	4,950	(1)(4)		4.09	%(3)
Fixed to Variable	January 22, 2009	$	8,300	(4)		5.38	%	$	8,300	(4)		4.09	%(3)
Fixed to Variable	July 13, 2009	$	6,930	(4)		7.25	%	$	6,930	(4)		4.09	%(3)
Fixed to Variable	July 13, 2009	$	3,980	(4)		7.50	%	$	3,980	(4)		4.09	%(3)
Variable to Fixed	February 3, 2009	$	8,100			3.44	%(2)	$	8,100			2.82	%
Variable to Fixed	June 25, 2009	$	10,910			3.44	%(2)	$	10,910			3.30	%
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
Interest Rate Cap	September 15, 2011	$	11,320			6.22	%		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 year ended December 31, 2006.

(3)		Weighted average Bond Market Association rate for the year ended December 31, 2006 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.

As of December 31, 2006, the Company had 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			Notional		Pay
	Maturity	Amount		Rate			Amount		Rate

Variable to Fixed	January 15, 2012	$	11,320		3.44	%(1)	$	11,320		3.44	%
Variable to Fixed	December 15, 2016	$	12,410		3.80	%(2)	$	12,410		3.69	%


(1)		Weighted average Bond Market Association rate for the year ended December 31, 2006.

(2)		Swap was entered into on December 15, 2006. Amount is the average Bond Market rate for the last two weeks of 2006.

As the above tables incorporate only those exposures or positions that existed as of December 31, 2006, they do not consider those exposures or positions that could arise after that date. The Company’s ultimate economic impact with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Company’s risk mitigating strategies at that time and interest rates.

Credit Risk of Cash Concentrations

The Company’s cash and cash equivalents are deposited primarily in a trust account at a single financial institution and are not covered by the Federal Deposit Insurance Corporation.

Credit Risk of Interest Rate Swap and Cap Agreements

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.


Item 8.	*Financial Statements and Supplementary Data.*

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of America First Apartment Investors, Inc.

We have audited the accompanying consolidated balance sheets of America First Apartment Investors, Inc. and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of America First Apartment Investors, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

DELOITTE & TOUCHE LLP

Omaha, Nebraska

March 7, 2007

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	December 31,			December 31,
	2006			2005
	(In thousands, except share and per share amounts)

ASSETS
Cash and cash equivalents	$	5,724		$	4,743
Restricted cash		9,391			53,279
Real estate assets:
Land		42,953			32,549
Building and improvements		345,296			222,814

Total		388,249			255,363
Less: accumulated depreciation		(46,517	)		(36,200	)

Real estate assets, net		341,732			219,163
Assets of discontinued operations		15,540			20,570
Investments in agency securities, at fair value		—			18,189
Investments in corporate equity securities, at fair value		3,526			4,073
Investment in mezzanine loan		—			7,173
In-place lease intangibles, net of accumulated amortization of $7,105 and $5,377, respectively		1,931			550
Other assets		7,920			6,219

Total assets	$	385,764		$	333,959


LIABILITIES
Accounts payable and accrued expenses	$	11,332		$	8,996
Dividends payable		2,872			2,759
Notes payable		2,413			2,413
Bonds and mortgage notes payable		249,651			185,764
Borrowings under repurchase agreements		12,825			36,202

Total liabilities		279,093			236,134

Contingencies
Shareholders’ Equity
Common stock, $0.01 per share par value; 500,000,000 shares authorized, 11,045,558 and 11,035,558 issued and outstanding		110			110
Additional paid-in capital		110,421			110,157
Accumulated deficit		(4,084	)		(12,318	)
Accumulated other comprehensive income (loss)		224			(124	)

Total shareholders’ equity		106,671			97,825

Total liabilities and shareholders’ equity	$	385,764		$	333,959

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

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)


	For the Year Ended			For the Year Ended			For the Year Ended
	December 31, 2006			December 31, 2005			December 31, 2004
	(In thousands, except per share amounts)

Revenues:
Rental revenues	$	49,134		$	39,207		$	26,320
Other revenues		223			382			39

Total revenues		49,357			39,589			26,359

Operating expenses:
Real estate operating		21,208			18,808			14,488
Property management		1,039			799			132
General and administrative		5,335			5,656			3,865
Depreciation		10,436			7,748			4,951
In-place lease amortization		1,728			2,674			2,130
Intangible asset impairment		199			—			—
Contract termination costs		—			11,619			5,911

Total operating expenses		39,945			47,304			31,477

Operating income (loss)		9,412			(7,715	)		(5,118	)
Interest and dividend income		1,995			1,725			1,252
(Loss) gain on redemption of securities		(64	)		—			212
Impairment of securities		(367	)		—			—
Loss on extinguishment of debt		(91	)		—			—
Interest expense		(11,231	)		(8,771	)		(5,140	)

Loss from continuing operations		(346	)		(14,761	)		(8,794	)

Income from discontinued operations		706			1,107			56
Gain on sales of discontinued operations		19,197			24,606			5,973

Net income (loss)		19,557			10,952			(2,765	)
Other comprehensive income (loss):
Unrealized holding losses on securities arising during the period		(13	)		(282	)		(344	)
Reclassification adjustments for losses (gains) realized in net income		378			—			(212	)
Unrealized gains (losses) on derivatives		(17	)		109			—

		348			(173	)		(556	)

Comprehensive income (loss)	$	19,905		$	10,779		$	(3,321	)

Earnings per share — basic and diluted:
Loss from continuing operations	$	(0.03	)	$	(1.40	)	$	(1.07	)
Income from discontinued operations		1.80			2.44			0.73

Net income (loss)	$	1.77		$	1.04		$	(0.34	)

Dividends declared per share	$	1.02		$	1.00		$	1.00

Weighted average number of shares — outstanding basic and diluted		11,037			10,513			8,243

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

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Years Ended December 31, 2006, 2005 and 2004


										Accumulated
	Common				Additional					Other
	Stock		Common		Paid-In		Accumulated			Comprehensive
	Shares		Stock		Capital		Deficit			Income (Loss)			Total
	(In thousands)

Balance, January 1, 2004		5,075	$	51	$	47,418	$	(714	)	$	605		$	47,360
Net loss		—		—		—		(2,765	)		—			(2,765	)
Issuance of common stock		5,436		54		55,327		—			—			55,381
Stock option compensation		—		—		21		—			—			21
Unrealized holding losses on securities arising during the period		—		—		—		—			(556	)		(556	)
Dividends declared		—		—		—		(9,149	)		—			(9,149	)

Balance, December 31, 2004		10,511		105		102,766		(12,628	)		49			90,292
Net income		—		—		—		10,952			—			10,952
Issuance of common stock		525		5		7,329		—			—			7,334
Stock option compensation		—		—		62		—			—			62
Unrealized holding losses on securities arising during the period		—		—		—		—			(282	)		(282	)
Unrealized gains (losses) on derivatives		—		—		—		—			109			109
Dividends declared		—		—		—		(10,642	)		—			(10,642	)

Balance, December 31, 2005		11,036		110		110,157		(12,318	)		(124	)		97,825
Net income		—		—		—		19,557			—			19,557
Issuance of common stock		10		—		86		—			—			86
Stock option compensation		—		—		178		—			—			178
Reclassification adjustment for losses recognized in net income		—		—		—		—			378			378
Unrealized holding losses on securities arising during the period		—		—		—		—			(13	)		(13	)
Unrealized gains (losses) on derivatives		—		—		—		—			(17	)		(17	)
Dividends declared		—		—		—		(11,323	)		—			(11,323	)

Balance, December 31, 2006		11,046	$	110	$	110,421	$	(4,084	)	$	224		$	106,671

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

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the			For the			For the
	Year Ended			Year Ended			Year Ended
	December 31,			December 31,			December 31,
	2006			2005			2004
				(In thousands)

Operating activities:
Net income (loss)	$	19,557		$	10,952		$	(2,765	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		10,812			9,317			7,122
Gain on sales of discontinued operations		(19,197	)		(24,606	)		(5,973	)
Impairment of securities		367			—			—
Loss (gain) on redemption of securities		64			—			(212	)
Loss on extinguishment of debt		91			—			—
Intangible asset impairment		199			—			—
Contract termination costs		—			11,619			5,911
Change in fair value on interest rate swap agreements		179			(85	)		(273	)
Amortization		1,919			3,269			3,321
Non-cash stock option compensation		178			62			21
Change in other assets		560			(272	)		385
Change in accounts payable and accrued expenses		1,351			1,104			704

Net cash provided by operating activities		16,080			11,360			8,241

Investing activities:
Capital improvements and real estate acquisitions		(147,444	)		(27,067	)		(5,398	)
Proceeds from sales of discontinued operations		34,873			54,352			11,076
Principal and sales proceeds received on agency securities		18,036			7,667			11,004
Change in restricted cash		43,888			(45,240	)		263
Proceeds from redemption of corporate equity securities		583			125			3,876
Investment in mezzanine loan		—			(7,444	)		—
Proceeds from principal repayment of mezzanine loan		7,094			350			—
Acquisition of America First Advisory Corporation		—			(4,065	)		—
Acquisition of America First Real Estate Investment Partners, LP		—			—			(3,963	)
Purchase of property management assets		—			—			(6,898	)
Cash received in acquisition of America First Real Estate Investment Partners, LP		—			—			8,400
Acquisition of agency securities		—			—			(1,565	)

Net cash (used) provided by investing activities		(42,970	)		(21,322	)		16,795

Financing activities:
Proceeds from mortgage notes payable		71,988			12,370			—
Borrowings under repurchase agreements		—			11,300			—
Proceeds from issuance of common stock		86			—			44
Debt financing costs paid		(1,534	)		(140	)		(419	)
Dividends and dividend equivalents paid		(11,191	)		(10,511	)		(7,790	)
Repayments of borrowings under repurchase agreements		(23,377	)		(2,973	)		(12,111	)
Principal payments on bonds and mortgage notes payable		(8,101	)		(5,975	)		(1,044	)

Net cash provided (used) by financing activities		27,871			4,071			(21,320	)

Net change in cash and cash equivalents		981			(5,891	)		3,716
Cash and cash equivalents at beginning of year		4,743			10,634			6,918

Cash and cash equivalents at year end	$	5,724		$	4,743		$	10,634

Supplemental disclosure of cash flow information:
Cash paid for interest	$	11,467		$	8,500		$	5,153

Noncash investing and financing activities:
Dividends declared but not paid	$	2,872		$	2,759		$	2,628

Issuance of shares for America First Advisory Corporation acquisition	$	—		$	7,334		$	—

Assumption of debt in connection with property acquisition	$	—		$	12,218		$	26,150

Issuance of shares for America First Real Estate Investment Partners, L.P. merger	$	—		$	—		$	55,338

Relinquishment of debt in connection with property disposition	$	—		$	—		$	8,775

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


1.	Organization

America First Apartment Investors, Inc. (the “Company”) is a Maryland corporation which, as of December 31, 2006, owned and operated 33 multifamily apartment projects and an office warehouse facility. The Company is also authorized to invest in mortgage-backed 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 Company’s ordinary taxable income to shareholders.

The Company is the successor in interest to America First Apartment Investors, L.P. (the “Partnership”) which merged with and into the Company as of January 1, 2003. Prior to that time the Company had no material assets or business operations. As a result of this merger, the Company assumed the assets, liabilities and business operations of the Partnership. In addition, on June 3, 2004, America First Real Estate Investment Partners, L.P. (“AFREZ”) merged with and into the Company as more fully described in Note 6. As a result of this merger, the Company acquired the assets, assumed the liabilities and business operations of AFREZ.


2.	Summary of Significant Accounting Policies

A) Financial Statement Presentation

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 accounting principles generally accepted in the United States of America 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.

B) Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with maturities of three months or less when purchased.

C) Restricted Cash

At December 31, 2006, restricted cash, which is legally restricted to its use, consisted primarily of resident security deposits, required maintenance reserves, escrowed funds and collateral for various interest rate swap agreements. At December 31, 2005, restricted cash also included $29.5 million of funds held in a tax-deferred Section 1031 exchange account and $16.7 million of cash providing additional collateral on the tax-exempt-mortgage bonds issued to finance Coral Point Apartments and Covey at Fox Valley. During fiscal 2006, these restrictions were met, and the Company primarily used the funds to partially finance acquisitions of additional real estate assets.

D) Real Estate Assets

The Company’s real estate assets are carried at cost less accumulated depreciation. Depreciation of real estate is based on the estimated useful life of the related asset, generally 271/2 years on multifamily residential apartment buildings, 311/2 years on commercial buildings and five to fifteen years on capital improvements and is calculated using the straight-line method. Depreciation of improvements on the Company’s commercial property is based on the term of the related tenant lease using the straight-line method. Maintenance and repairs are charged to expense as incurred, while significant improvements, renovations and replacements are capitalized.

Management reviews each property for impairment whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. The review of recoverability is based upon comparing the carrying value of each real estate property to the sum of its estimated undiscounted future cash flows. If impairment

exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value of the property exceeds its estimated fair value. There were no real estate impairment losses incurred and/or recorded during the three years in the period ended December 31, 2006.

The Company allocates the purchase price of property acquisitions to the acquired tangible assets, including land, buildings and identifiable intangible assets based on the fair value of those assets and liabilities. Identifiable intangible assets include the value of in-place leases.

The fair value of the tangible assets is determined based on the assumption that the building is vacant. In-place lease intangibles arise as a result of the allocation of a portion of the total acquisition costs of a 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.

E) Investment in Agency Securities and Corporate Equity Securities

Agency securities consist of mortgage-backed securities issued or guaranteed as to payment of principal or interest by an agency of the United States government or a federally-chartered corporation such as the Federal National Mortgage Association, Government National Mortgage Association, or the Federal Home Loan Mortgage Corporation. Corporate equity securities consist of shares of other REITs and similar real estate companies.

The Company accounts for its investments in securities in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, and has classified its investments in securities as available-for-sale.

Securities are carried at fair market value, with unrealized gains and losses reported in shareholders’ equity as a component of other comprehensive income. Fair value is determined by reference to broker quotes.

Premiums paid to acquire mortgage-backed securities are amortized using the effective yield method over the life of the related mortgage pool.

Security transactions are recorded on the trade date and realized gains or losses on security sales are based upon the specific identification method.

Interest income is recorded as earned and dividend income is recorded on the ex-dividend date.

F) Debt Financing Costs

Debt financing costs are capitalized and amortized on a straight-line basis over the stated life of the term of the related debt which approximates the effective yield method. Debt financing costs of approximately $2.0 million and $730,000 are included in other assets on the Company’s Consolidated Balance Sheets as of December 31, 2006 and 2005, respectively. These costs are net of accumulated amortization of $1.1 million and $1.7 million as of December 31, 2006 and 2005, respectively.

G) Borrowings under Repurchase Agreements

With a repurchase agreement, the Company sells a security to a lender and agrees to repurchase the same or similar securities in the future for a price that is higher than the original sales price. The difference between the sales price that the Company receives and the repurchase price that the Company pays represents interest paid to the lender. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which the Company pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral. At the maturity of the repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, the Company may renew such agreement at the then prevailing financing rate. These repurchase agreements may require the Company to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.

H) Revenue Recognition

The Company leases multifamily rental units under operating leases with terms of one year or less. Rental revenue is recognized, net of rental concessions, on a straight-line method over the related lease term. Rental income on commercial property is recognized on a straight-line basis over the term of each operating lease.

I) Income Taxes

The Company operates as, and has elected to be taxed as, a REIT under the Internal Revenue Code. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute at least 90% of adjusted taxable income to common shareholders. The Company intends to adhere to these requirements and maintain the REIT status. As a REIT, the Company is generally not subject to corporate level federal or state income tax on taxable income distributed currently to shareholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even though the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on income and property, and to federal income and excise taxes on undistributed taxable income.

Taxable income differs from income for financial statement purposes, primarily due to differences for tax purposes in the estimated useful lives and methods used to compute depreciation and the carrying value (basis) of the investment in real properties. The following table reconciles net income (loss) as reflected in the Company’s financial statements to REIT taxable income for 2006 (estimated), 2005, and 2004 (in thousands):


	Estimated
	2006			2005			2004

Net income (loss) per financial statements	$	19,557		$	10,952		$	(2,765	)
Reconciling items:
Add differences in deductions for depreciation and amortization		402			2,277			2,848
Add (less) basis difference for assets acquired or disposed		(16,857	)		(6,567	)		5,399
Other book/tax differences (net)		13			15			92

Taxable income subject to the dividend requirement	$	3,115		$	6,677		$	5,574

Minimum dividend required (90% of taxable income)	$	2,804		$	6,009		$	5,017

The actual tax deduction for dividends taken, and the taxability of dividends to shareholders, is based on a measurement of “earnings and profits” as defined by the Internal Revenue Code. Although similar to taxable income, as defined by the Internal Revenue code, earnings and profits differ from regular taxable income, primarily due to further differences in the estimated useful lives of assets and methods used to compute depreciation. The following table reconciles the dividends paid deduction taken by the Company (the portion of dividends paid that are taxable as ordinary income to shareholders) on its tax returns to cash dividends paid (in thousands):


	2006		2005		2004

Common dividends paid:
Ordinary dividends	$	5,358	$	4,310	$	7,246
Long-term capital gain		2,333		6,201		—
Return of capital		3,455		—		544

Total dividends paid	$	11,146	$	10,511	$	7,790

J) Discontinued Operations

Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), requires that the results of operations for properties sold during the period or classified as

held for sale at the end of the current period be classified as discontinued operations for all periods presented. The property-specific components of net earnings that are classified as discontinued operations include rental revenue, real estate operating expenses, depreciation expense and interest expense on debt collateralized by the property. The net gain or loss on the eventual disposal of the held for sale properties is also required to be classified as discontinued operations. During 2006, the Company sold the Belvedere Apartments, the Park at 58th Apartments, and Delta Crossing. Additionally, the Company has designated Cumberland Trace and Waters Edge as held for sale pursuant to SFAS No. 144. The divestiture of Cumberland Trace was completed on January 31, 2007 for proceeds of $10.9 million. Waters Edge is not currently under contract, but the Company is currently marketing the property to prospective buyers and it expects the property will be divested within the next six months. During 2005, the Company sold the Park Trace Apartments, The Retreat Apartments and the St. Andrews at Westwood Apartments. During 2004, The Glades was divested.

K) Net Income (Loss) per share

Net income (loss) per share is based on the weighted average number of shares outstanding during each year presented. Diluted net income (loss) per share includes shares issuable upon exercise of outstanding stock options where the conversion of such instruments would be dilutive.

L) Derivative Instruments and Hedging Activities

The Company accounts for its derivative and hedging activities in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. This statement requires the recognition of all derivative instruments as assets or liabilities in the Company’s Consolidated Balance Sheets and measurement of these instruments at fair value. The accounting treatment is dependent upon whether or not a derivative instrument is designated as a hedge and, if so, the type of hedge. The fair value of the interest rate swap and cap agreements are determined based upon current fair values as quoted by recognized dealers.

M) Reclassifications

The Company has revised its Consolidated Statements of Operations and Comprehensive Income (Loss) to separately present costs associated with property management operations. Such costs, which were previously included in general and administrative 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.

N) Recently Issued Accounting Pronouncements

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 consolidated financial statements.

In June 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections (“SFAS 154”), which changes the requirements for the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition via a cumulative effect adjustment within net income of the period of the change. SFAS 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 was effective for accounting changes made in fiscal years beginning after December 15, 2005; however, SFAS 154 does not change the transition provisions of any existing accounting pronouncements. The adoption of SFAS 154 did not have an impact on the Company’s consolidated financial statements.

In July 2006, the 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 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 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.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 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 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 September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, (“SAB 108”) to address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108, effective for the Company’s fiscal year ended December 31, 2006, provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The adoption of SAB 108 did not have an impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115. SFAS 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 159 does not affect existing accounting requirements for certain assets and liabilities to be carried at fair value. SFAS 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 159, and has not yet determined the impact on its consolidated financial statements.


3.	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. These purchases were primarily funded from the release of funds from the 1031 exchange account which was established with the proceeds received from the fourth quarter 2005 divestiture of St. Andrews of Westwood.

On July 27, 2006, the Company acquired the second phase of Jackson Park Place Apartments, an 80-unit complex located adjacent to the Company’s existing property in Fresno, California for $10.5 million. This acquisition 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 in June 2006.

On September 28, 2006, the Company acquired a four property portfolio comprised of 1,052 units for an aggregate purchase price of $64.3 million. The properties include Morganton Place, Cumberland Trace, and Village of Cliffdale, each located in Fayetteville, North Carolina and Woodberry Apartments in Asheville, North Carolina. The Company intends to sell Cumberland Trace as it did not meet the acquisition criteria of the Company’s strategic plan if bought on a stand alone basis, but was required to be purchased as the properties were being sold as a single portfolio.

The purchase price of the four properties was funded with approximately $17.1 million of cash, $37.6 million in the form of a mortgage loan drawn upon a new $70.5 million credit facility, a short term loan of $8.9 million, and the assumption of approximately $720,000 of liabilities, primarily related to accrued income taxes and tenant

security deposits. See Note 9 for a description of the new credit facility and related borrowings. The short-term loan that was undertaken to finance the acquisition of Cumberland Trace bears interest at a variable rate and matures on March 28, 2007. The cash portion was primarily funded by the remaining proceeds from the sale of the Belvedere Apartments and the release of $8.8 million of cash, which provided additional collateral on the bonds payable at Coral Point. The Company was able to utilize the $8.8 million by substituting the recent acquisition of the second phase of Jackson Park Place for the cash collateralizing the bonds payable at Coral Point. The former owner of the four property portfolio has placed $600,000 of the purchase price in an escrow account. These funds will be distributed to the Company if the three Fayetteville properties do not meet specific monthly revenue targets during the twelve month period ending September 30, 2007. The revenue escrow is included as a component of other assets in the Company’s consolidated balance sheet and has been included as a component of the purchase price allocation.

On December 21, 2006, the Company completed the acquisition of the Cornerstone Apartments, a 420-unit complex located in Independence, Missouri for $37.7 million. The purchase was partially funded through the release of funds from the 1031 exchange account which was established with the proceeds from the sale of Delta Crossing, cash on hand, and $25.5 million in the form of a mortgage loan drawn upon the Company’s credit facility.

In 2005, the Company completed the acquisition of two properties, The Reserve at Wescott Plantation, a 192-unit complex located in Summerville, South Carolina, and Tregaron Oaks, a 300-unit complex located in Bellevue, Nebraska. The purchase of the Reserve at Wescott included 9.2 acres of adjacent land that is currently being prepared for development. The aggregate purchase price for these properties was $37.9 million. The Tregaron Oaks purchase was partially funded through a 10-year, $12.4 million mortgage note that bears interest at 5.1%. The remaining purchase price was funded with cash on hand. In connection with the acquisition of The Reserve at Wescott Plantation, the Company assumed the existing first mortgage loan of $12.2 million.

The following purchase price allocations are substantially complete, but may change as the Company receives final appraisals and the escrow period for the three Fayetteville properties expires. (in thousands):


	2006		2005

Land	$	11,580	$	3,415
Buildings		128,187		33,000

Total real estate assets		139,767		36,415
Other assets		5,951		1,489

Total assets acquired		145,718		37,904

Mortgage notes payable		71,988		12,218
Other liabilities		1,621		577

Total liabilities		73,609		12,795

Net assets acquired	$	72,109	$	25,109

Included in other assets in 2006 and 2005 is $3.5 million and $890,000, respectively, of in-place lease intangible assets which will be amortized over the weighted average lives of the respective leases.


4.	Discontinued Operations

During 2006, the Company sold three properties, the Belvedere Apartments, the Park at 58^th Apartments, and Delta Crossing, for cash proceeds of $34.9 million, net of $1.0 million of transaction costs. During 2005, the Company divested of three properties, the Park Trace Apartments, The Retreat Apartments, and St. Andrews at Westwood, for cash proceeds of $54.4 million, net of closing costs of approximately $1.1 million. In 2004, The Glades Apartments were sold for a total sales price of $20.0 million, consisting of cash proceeds of $11.1 million, net of approximately $150,000 of closing costs, and the assumption of $8.8 million of debt.

In connection with these transactions, the Company has recognized gains of $19.2 million, $24.6 million and $6.0 million in 2006, 2005 and 2004, respectively.

Summary results of operations for the aforementioned properties, as well as Waters Edge and Cumberland Trace, which are held for sale, are as follows (in thousands):


	For the Year			For the Year			For the Year
	Ended			Ended			Ended
	December 31,			December 31,			December 31,
	2006			2005			2004

Revenues	$	3,526		$	9,113		$	10,863
Operating expenses		(2,427	)		(7,001	)		(9,410	)
Other expenses, net		(393	)		(1,005	)		(1,397	)

Income from discontinued operations	$	706		$	1,107		$	56

The Company has allocated interest to the divested properties in accordance with Emerging Issue Task Force (“EITF”) Issue No. 87-24, Allocation of Interest to Discontinued Operations. Interest expense of $402,000, $1.0 million, and $1.4 million was allocated in the years ended December 31, 2006, 2005 and 2004, respectively.


5.	Internalization Transactions

On December 30, 2005, the Company completed its transition to a self-advised and self-managed REIT through the merger with America First Advisory Corporation (the “Advisor”). Prior to the merger, the Advisor provided management and advisory services to the Company. The purchase price was approximately $11.8 million, including $400,000 of transaction costs. Approximately $4.0 million of the merger consideration was paid in cash and the remainder was paid by the issuance of 525,000 shares of common stock. As a result of this transaction, the Company no longer pays fees or expense reimbursements to the Advisor. During 2005, the Company paid $4.2 million in fees and reimbursable expenses to the Advisor.

On November 8, 2004, America First PM Group, Inc., (“PM Group”) a wholly-owned subsidiary of the Company, acquired certain property management assets, rights to use certain proprietary systems, certain property management agreements, certain employment agreements and other intangible assets from America First Properties Management Companies, LLC (“America First Properties”) and its parent, Burlington Capital Group LLC, (formerly known as America First Companies, LLC) (“Burlington”), for total consideration of $7.0 million, including $200,000 of transaction costs. Prior to this transaction, America First Properties managed each of the multi-family apartment complexes owned by the Company. The fees for services provided were $1.3 million for the year ended December 31, 2004, and are included in real estate operating expenses in the Consolidated Statements of Operations and Comprehensive Income (Loss). As a result of this transaction, the management of the Company’s properties and certain other properties owned by unaffiliated parties were assumed by the Company.

In connection with each transaction, a Special Committee of the Board of Directors of the Company (“Special Committee”), comprised solely of independent directors of the Company, negotiated the terms and conditions of the transaction on behalf of the Company. In each transaction, the Special Committee retained an independent investment banking firm to render an opinion as to the fairness to the Company of the consideration paid for the acquired assets. In accordance with EITF Issue No. 04-01, Accounting for Preexisting Relationships between Parties to a Business Combination, the Company expensed $11.6 million and $5.9 million in 2005 and 2004, respectively, as an allocation of the acquisition price to the termination of the pre-existing contractual relationships.


6.	Merger with AFREZ

On May 26, 2004, the shareholders of the Company approved a merger with AFREZ, pursuant to the Agreement and Plan of Merger entered into by the Company and AFREZ on November 25, 2003 (the “Merger Agreement”). The merger became effective on June 3, 2004. As a result of the merger, AFREZ was merged with and into the Company. The Company was the surviving entity and assumed all of the assets, liabilities and business operations of AFREZ, including 14 multifamily apartment properties containing 2,783 rental units located in Arizona, Florida, Illinois, Michigan, North Carolina, Ohio, Tennessee and Virginia.


7.	Real Estate Assets

The Company’s real estate assets as of December 31, 2006 and 2005 are comprised of the following (in thousands):


								Carrying		Carrying
						Building		Value at		Value at
		Number				and		December 31,		December 31,
Property Name	Location	of Units		Land		Improvements		2006		2005

Arbor Hills(1)	Antioch, TN		548	$	4,400	$	25,898	$	30,298	$	29,934
Arbors of Dublin(1)	Dublin, OH		288		1,750		15,466		17,216		—
Bluff Ridge Apartments(1)	Jacksonville, NC		108		203		3,587		3,790		3,725
Brentwood Oaks Apartments(1)	Nashville, TN		262		2,000		10,139		12,139		11,883
Coral Point Apartments(1)	Mesa, AZ		337		2,240		9,551		11,791		11,627
Cornerstone Apartments(1)	Independence, MO		420		2,150		34,513		36,663		—
Covey at Fox Valley(1)	Aurora, IL		216		1,320		10,459		11,779		11,831
Elliot’s Crossing Apartments(1)	Tempe, AZ		247		1,301		9,933		11,234		11,021
Fox Hollow Apartments(1)	High Point, NC		184		1,000		5,211		6,211		6,155
Greenbriar Apartments(1)	Tulsa, OK		120		648		3,882		4,530		4,476
Highland Park Apartments(1)	Columbus, OH		252		1,562		6,496		8,058		7,911
Huntsview Apartments(1)	Greensboro, NC		240		1,845		6,756		8,601		8,483
Jackson Park Place Apartments(1)	Fresno, CA		296		1,400		11,023		12,423		12,239
Jackson Park Place Apartments — Phase II(1)	Fresno, CA		80		1,425		8,828		10,253		—
Lakes of Northdale Apartments(1)	Tampa, FL		216		1,553		8,985		10,538		10,429
Littlestone of Village Green(1)	Gallatin, TN		200		621		10,170		10,791		10,652
Misty Springs Apartments	Daytona Beach, FL		128		742		4,079		4,821		4,725
Monticello Apartments	Southfield, MI		106		565		5,338		5,903		5,856
Morganton Place(1)	Fayetteville, NC		280		1,400		17,062		18,462		—
Oakhurst Apartments(1)	Ocala, FL		214		847		8,608		9,455		9,385
Oakwell Farms Apartments(1)	Nashville, TN		414		1,946		16,413		18,359		18,172
Shelby Heights(1)	Bristol, TN		100		175		2,994		3,169		3,140
The Greenhouse(1)	Omaha, NE		126		730		14,916		15,646		—
The Hunt Apartments(1)	Oklahoma City, OK		216		550		7,150		7,700		7,660
The Park at Countryside(1)	Port Orange, FL		120		647		2,775		3,422		3,367
The Ponds at Georgetown	Ann Arbor, MI		134		653		7,008		7,661		7,531


									Carrying			Carrying
							Building		Value at			Value at
		Number					and		December 31,			December 31,
Property Name	Location	of Units			Land		Improvements		2006			2005

The Reserve at Wescott Plantation(1)	Summerville, SC		192			1,725		15,629		17,354			17,326
Tregaron Oaks Apartments(1)	Bellevue, NE		300			1,690		17,549		19,239			19,089
Village at Cliffdale(1)	Fayetteville, NC		356			1,775		19,975		21,750			—
Waterman’s Crossing(1)	Newport News, VA		260			1,620		12,966		14,586			14,445
Woodberry Apartments(1)	Asheville, NC		168			1,174		8,863		10,037			—
The Exchange at Palm Bay(1)	Palm Bay, FL		72,007	(2)		1,296		3,074		4,370			4,301

										388,249			255,363
Less accumulated depreciation										(46,517	)		(36,200	)

Balance at end of year									$	341,732		$	219,163


(1)		Property is encumbered as described in Note 8.

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


8.	Bonds and Mortgage Notes Payable

The Company has financed its multifamily apartment properties and its commercial property with mortgage debt consisting of twelve tax-exempt bond financings nine taxable mortgage notes, and one short-term note at December 31, 2006. Each debt obligation is secured by a first mortgage or deed of trust on the property. Bonds and mortgage notes payable as of December 31, 2006 and 2005 consist of the following (dollars in thousands):


	Effective						Carrying Amount
	Interest			Maturity	Payment and	Annual	December 31,
Collateral	Rate			Date	Prepayment or Redemption Terms	Payments	2006		2005

Bonds Payable:
Coral Point Apartments and Jackson Park Place Apartments — Phase II		4.97	%	03/01/2028	Semiannual payment of interest due each March 1 and September 1. Prepayable at par in March 2007.	interest only	$	13,090	$	13,090
Covey at Fox Valley(7)		3.69	%(8)	10/15/2027	Monthly payments of interest. Prepayable at any time, subject to a prepayment penalty.	interest only		12,410		12,410
Brentwood Oaks Apartments(7)		3.44	%(1)	07/15/2031	Monthly payments of interest. Prepayable at any time, subject to a prepayment penalty.	interest only		11,320		11,320
Lakes of Northdale and Bluff Ridge Apartments		3.73	%(2)	05/15/2012	Monthly payments of interest. Prepayable subject to prepayment penalty.	interest only		9,610		9,610
Jackson Park Place Apartments		5.80	%	01/01/2028	Monthly payment of principal and interest. Prepayable at par 1% in January 2007.	$599		7,262		7,434
The Hunt Apartments		3.30	%(3)	07/01/2029	Semiannual payment of interest due each January 15 and July 15. Prepayable at any time.	interest only		6,930		6,930
Oakhurst Apartments		4.09	%(4)	12/01/2007	Semiannual payment of interest due each June 1 and December 1. Prepayable at any time.	interest only		5,300		5,300
The Exchange at Palm Bay		4.09	%(4)	11/01/2010	Monthly payment of principal and interest. Prepayable at any time.	$449		4,950		5,060
Belvedere Apartments		N/A		N/A(9)	Semiannual payment of interest due each June 1 and December 1. Prepayable at par.	interest only		—		4,800
Greenbriar Apartments		3.30	%(3)	07/01/2029	Semiannual payment of interest due each January 15 and July 15. Prepayable at any time.	interest only		3,980		3,980
Shelby Heights and The Park at Countryside		6.10	%	03/01/2022	Semiannual payment of principal and/or interest due each March 1 and September 1. Prepayable at par + 1% in March 2007.	range from $266 to $276		2,660		2,760
Elliot’s Crossing Apartments		2.82	%(5)	04/01/2030	Semiannual payment of interest due each April 1 and October 1. Prepayable at par +1.5% in April 2009.	$540		8,153		8,146
Arbor Hills and Littlestone of Village Green		3.76	%(6)	12/01/2025	Monthly payments of interest. Prepayable at any time, subject to a prepayment penalty.	interest only		26,150		26,150
The Park at 58^th Apartments		N/A		N/A(9)	Semiannual payment of principal and/or interest due each March 1 and September 1. Prepayable at par + 1% in March 2006.	range from $220 to $225		—		2,180

							$	111,815	$	119,170


	Effective						Carrying Amount
	Interest			Maturity	Payment and	Annual	December 31,
Collateral	Rate			Date	Prepayment or Redemption Terms	Payments	2006		2005

Mortgage Notes Payable:
Oakwell Farms Apartments		6.94	%	05/01/2009	Monthly payment of principal and interest due the 1st of each month. Prepayable subject to a yield maintenance agreement.	$1,029	$	11,690	$	11,900
Waterman’s Crossing		5.52	%	11/01/2012	Monthly payment of principal and interest due on the 1st of each month. Prepayable subject to a yield maintenance agreement.	$790		10,623		10,746
Huntsview Apartments		5.83	%	01/01/2012	Monthly payment of principal and interest due on the 1st of each month. Prepayable subject to a yield maintenance agreement.	$509		6,853		6,986
Highland Park Apartments		4.69	%	09/01/2013	Monthly payment of principal and interest due on the 1st of each month. Prepayable 90 days prior to maturity.	$435		6,300		6,404
Fox Hollow Apartments		6.91	%	03/01/2011	Monthly payment of principal and interest due on the 1st of each month. Prepayable subject to a yield maintenance agreement.	$493		5,871		5,960
Tregaron Oaks Apartments		5.12	%	09/01/2015	Monthly payments of interest due on the 1st of each month. Prepayable subject to a yield maintenance agreement.	interest only		12,370		12,370
The Reserve at Wescott Plantation		5.75	%	11/01/2044	Monthly payment of principal and interest due on the 1st of each month. Prepayable at par + 5% in July 2009.	$788		12,141		12,228
Morganton Place, Village at Cliffdale and Woodberry Apartments (7)		5.56	%	10/01/2016	Monthly payments of interest until October 1, 2012. Monthly payments of principal and interest from November 1, 2012 until October 1, 2016. Prepayable subject to a yield maintenance agreement.	currently interest only		37,638		—
Cornerstone Apartments (7)		5.44	%	01/01/2017	Monthly payments of interest until January 1, 2012. Monthly payments of principal and interest from February 1, 2012 until January 1, 2017. Prepayable subject to a yield maintenance agreement.	currently interest only		25,500		—

							$	128,986	$	66,594

Cumberland Trace — Short-term note		7.88	%	03/28/2007	Monthly payments of interest. Prepayable anytime			8,850		—

							$	249,651	$	185,764


(1)		In January 2005, the Company entered into an interest rate swap transaction which fixed the rates on the bonds to 3.44% through January 2012.


(2)		Bond payable bears interest at a highly rated bond composite variable rate that is reset weekly and capped at 7.50%, the rate at 12/31/2006 was 3.98%, averaged 3.73% for the year.

(3)		In June 2004, the Company entered into an interest rate swap transaction which fixed the rates on the bonds to 3.30%, plus the 0.65% variable rate spread, through June 2009.

(4)		The interest rate on these bonds is variable based upon the Bond Market Association average rate plus 0.65%.

(5)		The Company entered into an interest rate swap transactions that fix the rates on the bond to 2.82%, plus the 0.65% variable rate spread, through June 2009.

(6)		Bond payable bears interest at a highly rated bond composite variable rate that is reset weekly and is capped at 4.5%, the rate at 12/31/2006 was 3.99%, the average for the period was 3.76%.

(7)		Property is included within the credit facility described in Note 9. The borrowings under the credit facility are secured by first mortgages on these properties as well as The Greenhouse and Arbors of Dublin.

(8)		In December 2006, the Company entered into an interest rate swap transaction that fixed the rate on the bonds to 3.69% through December 2016.

(9)		The property collateralizing this debt was sold during 2006 and the related bonds were repaid.

Accrued interest of $1.7 million as of both December 31, 2006 and 2005 is included in Accounts payable and accrued expenses on the Company’s Consolidated Balance Sheets.

As of December 31, 2006, the Company’s aggregate borrowings with maturities during the next five years and thereafter are as follows (in thousands):


	Principal
Maturity	Amount

2007	$	15,354
2008		1,280
2009		12,331
2010		5,578
2011		6,420
Thereafter		208,688

	$	249,651


9.	Credit Facility

On September 28, 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 was initially established for $70.5 million and may be expanded with the consent of the lenders. 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.

As of December 31, 2006 the Facility had been expanded, and the Company had utilized $63.1 million to partially finance the acquisitions of Morganton Place, Village at Cliffdale, Woodberry Apartments, and Cornerstone Apartments. The Company has also utilized Fannie Mae’s credit enhancement on its Brentwood Oaks and Covey at Fox Valley bonds payable. As of December 31, 2006, the Company had a total of $86.2 million outstanding under the Facility, and has the ability, until September 28, 2007, to borrow an additional $21.6 million at a fixed interest rate of 5.68%. Any borrowings under the Facility will have a term of 10 years from the date of the transaction. The specific amounts borrowed and payment terms are described in Note 8.

The Facility also contains financial covenants that require the Company to maintain at all times (a) a Net Worth (defined as total shareholders’ equity plus accumulated depreciation) of not less than $100 million, (b) cash and cash equivalents (as defined in the Facility) of not less than $3 million, and (c) a total balance of cash, cash equivalents and investments in publicly-traded common or preferred stock of not less than $4 million. The Company is in compliance with such covenants.


10.	Interest Rate Swap and Cap Agreements

The Company may enter into interest rate swap and cap agreements to manage or hedge its interest rate risk on its bonds and mortgage notes payable. In the absence of a specific and effective hedging relationship, interest rate swaps and caps are accounted for as free standing financial instruments which are marked to market each period through the statement of operations.


		Notional		Receive			Notional		Pay
	Maturity	Amount		Rate			Amount		Rate

Variable to Fixed	January 15, 2012	$	11,320		3.44	%(1)	$	11,320		3.44	%
Variable to Fixed	December 15, 2016	$	12,410		3.80	%(2)	$	12,410		3.69	%


(1)		Weighted average Bond Market Association rate for the year ended December 31, 2006.

(2)		Swap was entered into on December 15, 2006. Amount is the average Bond Market rate for the last two weeks of 2006.

The swaps’ fair market value was $92,000 and $109,000 at December 31, 2006 and 2005, respectively, and is included within Other assets on the Company’s Consolidated Balance Sheets. Changes in the fair market value of the interest rate swaps are recorded as a component of Accumulated Other Comprehensive Income in the Consolidated Statements of Shareholders’ Equity. The amount of ineffectiveness on these hedges is not material. As the term of the variable rate bonds exceed the term of the interest rate swaps, the Company will be exposed to variability in changes in interest rates upon the maturity of the swaps.


	Interest Rate Swaps and Caps
		Counterparty						Company
		Notional			Receive/			Notional			Pay
	Maturity	Amount			Cap Rate			Amount			Rate

Fixed to Variable	September 20, 2007	$	5,300	(4)		7.13	%	$	5,300	(4)		4.09	%(3)
Fixed to Variable	December 6, 2007	$	4,950	(1)(4)		7.75	%	$	4,950	(1)(4)		4.09	%(3)
Fixed to Variable	January 22, 2009	$	8,300	(4)		5.38	%	$	8,300	(4)		4.09	%(3)
Fixed to Variable	July 13, 2009	$	6,930	(4)		7.25	%	$	6,930	(4)		4.09	%(3)


	Interest Rate Swaps and Caps
		Counterparty						Company
		Notional			Receive/			Notional			Pay
	Maturity	Amount			Cap Rate			Amount			Rate

Fixed to Variable	July 13, 2009	$	3,980	(4)		7.50	%	$	3,980	(4)		4.09	%(3)
Variable to Fixed	February 3, 2009	$	8,100			3.44	%(2)	$	8,100			2.82	%
Variable to Fixed	June 25, 2009	$	10,910			3.44	%(2)	$	10,910			3.30	%
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
Interest Rate Cap	September 15, 2011	$	11,320			6.22	%		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 year ended December 31, 2006.

(3)		Weighted average Bond Market Association rate for the year ended December 31, 2006 plus 0.65%.

(4)		These are total return swaps.

The fair market value of these interest rate swap and cap agreements is included in Other assets on the Company’s Consolidated Balance Sheets in the amount of $222,000 and $401,000 as of December 31, 2006 and 2005. Changes in the fair market value of the interest rate swaps and caps that do not qualify for hedge accounting are recognized as a component of Interest expense in the Consolidated Statements of Operations and Comprehensive Income (Loss). For the years ended December 31, 2006, 2005 and 2004, the Company recognized increases (decreases) of interest expense of $179,000, $(85,000) and $(273,000), respectively, related to these agreements.


11.	Borrowings under Repurchase Agreements

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

Carrying Amount

Interest

Maturity

December 31,

Collateral

Rate

Date

Payment Schedule

2006

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 of the following 100% owned properties:

Misty Springs

repaid

Interest payments and principal due at maturity

—

2,919

Waters Edge

5.32

01/27/2007

Interest payments and principal due at maturity

1,400

3,881


						Carrying Amount
	Interest			Maturity		December 31,		December 31,
Collateral	Rate			Date	Payment Schedule	2006		2005

Monticello		5.32	%	01/26/2007	Interest payments and principal due at maturity		4,500		4,500

The Ponds at Georgetown		5.33	%	01/29/2007	Interest payments and principal due at maturity		6,925		6,975

						$	12,825	$	36,202

Accrued interest of approximately $8,000 and approximately $72,000 as of December 31, 2006 and 2005 is included in Accounts payable and accrued expenses on the Company’s Consolidated Balance Sheets.

The Company intends to either repay or renew the repurchase agreements as they come due with new repurchase agreements having similar terms (see Note 22).


12.	Notes Payable

Notes payable were acquired as a result of the Company’s merger with AFREZ, as described in Note 6. These notes were originally issued by AFREZ in a roll-up transaction of two partnerships, Capital Source L.P. and Capital Source L.P. II (the “Cap Source Partnerships”) on December 31, 2000. The notes bear interest at the rate equal to 120% of the annual applicable federal rate for debt instruments with a term of not over three years as determined by the Internal Revenue Code and applicable regulations thereunder. The annual interest rate on the notes is calculated by averaging such interest rates for each month. The average rate for 2006 was 5.84%. The notes provide for annual installments of accrued interest payable on the 15th of each January. The unpaid principal balance and any accrued but unpaid interest is due January 15, 2008. These notes were repaid in January, 2007 (see Note 22).


13.	Investments in Securities

The following table presents the components of the carrying value of the Company’s investments in securities as of December 31, 2006 and 2005 (in thousands):


			Gross		Gross
			Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

2006:
Corporate Equity Securities	$	3,394	$	141	$	(9	)	$	3,526
2005:
Agency Securities	$	18,485	$	—	$	(296	)	$	18,189
Corporate Equity Securities		4,010		87		(24	)		4,073

During the first quarter of 2006 the Company decided to divest substantially all of its investment in agency securities and at that time determined that it would not recover the previously unrecognized losses recorded in accumulated other comprehensive income. As a result of this determination the Company 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 completed the sale of the agency securities for $15.7 million, which resulted in the recognition of a $53,000 loss in the second quarter of 2006. Prior to the sale of the agency securities, they served as collateral for approximately $17.9 million of borrowings under repurchase agreements. The proceeds from the sale of the agency securities were utilized to repay the repurchase agreement borrowings and accrued interest thereon.


14.	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 and its Affiliates (in thousands):


	For the Year Ended		For the Year Ended
	December 31,		December 31,
	2005		2004

Administrative fees- general(1)	$	1,586	$	1,200
Administrative fees- agency securities(2)		60		154
Property management fees(3)		—		1,300
Property acquisition fees(4)		456		371
Reimbursement of direct and allocated costs(5)		2,132		2,894


(1)		Administrative fees — 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 Consolidated Statements of Operations and Comprehensive Income (loss).

(2)		Administrative fees — 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 shareholders’ 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)		Property management fees — Until November 8, 2004, an affiliate of the Advisor, America First Properties, provided property management services for the multifamily properties owned by the Company. The fees for services provided represented the lower of: (i) costs incurred in managing the properties, or (ii) customary fees for such services determined by reference to national statistics.

(4)		Property acquisition fees — The Advisor received a fee of 1.25% of the gross purchase price of real estate assets for identifying, evaluating and acquiring real estate assets on behalf of the Company.

(5)		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.

Office Lease

For the year ended December 31, 2006, the Company incurred expenses of $173,000 to lease office space from The Burlington Capital Group, LLC, which is an affiliate of certain directors of the Company.

Mezzanine Loan

In September 2005, the Company loaned $7.4 million to America First Communities Offutt Developer, LLC (the “Developer”), which is an affiliate of certain directors of the Company. The funds were used by the Developer to partially finance the military housing privatization project at Offutt Air Force Base in Bellevue, Nebraska. The loan agreement required quarterly payment of principal and interest commencing December 1, 2005, with the final

installment scheduled for September 1, 2009. During 2005, the Company recognized $286,000 of interest income related to this loan. 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 then outstanding principal balance, $237,000 of accrued interest and an early termination fee of $89,000.


15.	Stock Option Plan

The Company adopted a Stock Option Plan (the “Plan”) on April 1, 2002 to permit awards of equity based compensation and dividend equivalent rights (“DERs”) to individuals providing services to the Company. In May 2006, the Company’s shareholders 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. As of December 31, 2006, 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 period ended December 31, 2006 is summarized as follows:


	Number of			Weighted Average		Aggregate
	Shares			Exercise Price		Intrinsic Value

Balance at January 1, 2004		40,000		$	8.73	$	87,600
Cancelled		(5,000	)		8.73		(10,950	)
Exercised		(5,000	)		8.73		(10,950	)

Balance at December 31, 2004		30,000			8.73		65,700
Granted		31,000			12.87		99,820

Balance at December 31, 2005		61,000			10.83		165,520
Granted		101,467			16.70		479,939
Exercised		(10,000	)		8.73		(21,900	)

Balance at December 31, 2006		152,467		$	14.88	$	623,559

Options exercisable at December 31, 2006		63,367		$	13.13	$	221,858

On February 8, 2006, the Company granted a total of 5,000 non-qualified stock options (NQSOS) to acquire common stock at an exercise price of $14.07 per share. On August 9, 2006, 44,800 NQSOS were granted at an exercise price of $14.80 per share. On November 15, 2006 an additional 51,667 NQSOS were granted at an exercise price of $18.60 per share. The options vest 25% on the grant date and 25% on each of the next three anniversaries of the grant date. These options had an aggregate fair value of approximately $480,000 on their grant dates.

During the year ended December 31, 2005, the Company granted a total of 31,000 NQSOS at a weighted average exercise price of $12.87 per share. The fair value of these options was approximately $100,000. The options vest 25% on the grant date and 25% on each of the next three anniversaries of the grant date. There were no stock option grants made during the year ended December 31, 2004. All stock option grants made during 2006 and 2005 also included dividend equivalent rights. The Company currently expects that all options granted will vest.

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:


	2006	2005

Risk-free interest rate	4.72%	4.30%
Expected life	6 years	6 years
Volatility	15%	12%
Estimated fair value	$4.73	$3.22

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. As of December 31, 2006, the outstanding options have a remaining average contractual life of 9.1 years. The average contractual life for the exercisable options at December 31, 2006 is 8.3 years. Compensation expense, based upon the graded vesting schedule, for stock based compensation was $178,000, $62,000 and $21,000 for the years ended December 31, 2006, 2005 and 2004, respectively, and is included within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). The Company expects to recognize an additional $358,000 of compensation costs related to previously awarded stock option grants which will vest during the next 3.6 years.


16.	Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash and cash equivalents, restricted cash, investments in agency securities, investments in corporate, equity securities, accounts payable, dividends payable, interest rate swaps, interest rate caps, and borrowings under repurchase agreements: Fair value approximates the carrying value of such assets and liabilities due to their accounting policy and/or short-term nature.

Bonds and mortgage notes payable and notes payable: Fair value is generally based on estimated future cash flows discounted using the quoted market rate of similar obligations. Refer to the table below for the carrying amount and estimated fair value of such instruments (in thousands):


	As of December 31, 2006				As of December 31, 2005
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value

Bonds and mortgage notes payable	$	249,651	$	253,273	$	185,764	$	193,602

Notes payable	$	2,413	$	2,413	$	2,413	$	2,413


17.	Contingencies

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


18.	Net Income (Loss) Per Share

Basic earnings per share (EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential reduction in EPS that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. EPS under the basic and diluted computation are as follows (in thousands, except per share amounts):


	For the Year Ended			For the Year Ended			For the Year Ended
	December 31,			December 31,			December 31,
	2006			2005			2004

Loss from continuing operations	$	(346	)	$	(14,761	)	$	(8,794	)
Income from discontinued operations		19,903			25,713			6,029

Net income (loss) available to common shareholders — basic and diluted	$	19,557		$	10,952		$	(2,765	)

Weighted average common shares outstanding — basic and diluted		11,037			10,513			8,243

Earnings per share — basic and diluted:
Loss from continuing operations	$	(0.03	)	$	(1.40	)	$	(1.07	)
Income from discontinued operations		1.80			2.44			0.73

Net income (loss)	$	1.77		$	1.04		$	(0.34	)

The computation of diluted EPS for the years ended December 31, 2006, 2005 and 2004 excluded 152,467, 61,000 and 30,000, respectively, of outstanding stock options because the effect of these securities would have been anti-dilutive as the Company incurred a loss from continuing operations for the year.


19.	Employee Benefit Plans

With the acquisition of certain employment agreements from America First Properties Management Company LLC, in November 2004, the Company assumed the America First PM Group, Inc. 401(k) Plan (the “Plan”) which is a defined contribution plan that satisfies the requirements of Section 401(a) of the Internal Revenue Code. Eligible employees may contribute up to the maximum annual amount as set by the Internal Revenue Service. The Company matches contributions to the Plan of $0.25 for each $1.00 contributed by the participant. All matching contributions vest immediately. In addition, each year the Company may make additional discretionary, qualified non-elective employer contributions to the Plan. Such contributions to the Plan are allocated among eligible participants in the proportion of their salaries to the total salaries of all participants. The Company’s matching contribution to this plan was $63,000, $53,000 and $10,000 for the years ended December 31, 2006, 2005 and 2004, respectively. To date, there have been no discretionary, qualified non-elective contributions made. The Plan is funded on a current basis.


20.	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 apartment 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 were expected to be sold during 2006. As a result, the Company determined that a portion of the intangible asset was impaired and recorded a charge of $199,000.


21.	Segment Reporting

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

The Company defines each of its multifamily apartment properties as an individual operating segment. It has determined that all multifamily apartment properties have similar economic characteristics and meet the other criteria which permit the multifamily apartment properties to be aggregated into one reportable segment, that being the acquiring, holding, operating and selling of multifamily apartment properties. Prior to the second quarter of 2006, the Company’s chief operating decision-maker assessed operating results based upon segment net income. Concurrent with the sale of the agency securities, the chief operating decision-maker began to assess operating performance of the remaining operating segments based upon net operating income. Net operating income, as defined by the Company, differs from net income in that it excludes depreciation, amortization, interest expense, and interest income from the determination of profit or loss. The Company has recast the segment results for the years ended December 31, 2005 and 2004 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 assesses and measures segment operating results based on net operating income at the commercial property level.

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


	For the Year Ended			For the Year Ended			For the Year Ended
	December 31,			December 31,			December 31,
	2006			2005			2004

Total revenues:
Multifamily	$	48,356		$	38,555		$	25,477
Commercial		778			652			843

Total segment revenues		49,134			39,207			26,320
Other		223			382			39

Total revenues	$	49,357		$	39,589		$	26,359

Segment net operating income:
Multifamily	$	27,379		$	19,948		$	11,178
Commercial		547			451			654

Segment net operating income		27,926			20,399			11,832
Property management expense		(1,039	)		(799	)		(132	)
General and administrative expenses		(5,335	)		(5,656	)		(3,865	)
Depreciation expense		(10,436	)		(7,748	)		(4,951	)
In-place lease amortization		(1,728	)		(2,674	)		(2,130	)
Intangible asset impairment		(199	)		—			—
Contract termination costs		—			(11,619	)		(5,911	)
Interest expense		(11,231	)		(8,771	)		(5,140	)
Interest income, other income and expenses, net		1,696			2,107			1,503
Income from discontinued operations		706			1,107			56
Gain (loss) on sales of real estate		19,197			24,606			5,973

Net income	$	19,557		$	10,952		$	(2,765	)


	For the Year Ended		For the Year Ended		For the Year Ended
	December 31,		December 31,		December 31,
	2006		2005		2004

Assets (as of year end)
Multifamily	$	370,351	$	248,162	$	232,709
Commercial		2,126		2,541		2,881
Other		13,287		83,256		61,807

Total	$	385,764	$	333,959	$	297,397

Interest expense
Multifamily	$	9,903	$	8,206	$	4,775
Commercial		210		161		233
Other		1,118		404		132

Total	$	11,231	$	8,771	$	5,140

Depreciation and Amortization
Multifamily	$	11,775	$	10,139	$	6,865
Commercial		201		176		199
Other		188		107		17

Total	$	12,164	$	10,422	$	7,081

Other revenues are comprised of fees earned from the management of properties owned by third parties. Other assets include investments in corporate equity securities, unrestricted cash, non-property specific restricted cash, and other corporate related assets. The Company does not derive any of its consolidated revenues from foreign countries and does not have any major customers that individually account for 10% or more of the Company’s consolidated revenues.


22.	Subsequent Events

On January 25, 2007, the Company drew down $10 million of the $21.6 million available under the Facility described in Note 9 at the pre-determined fixed rate of 5.68%. The proceeds from the loan were utilized to repay $7.9 million of the $12.8 million outstanding repurchase agreements. This transaction allowed the Company to fix the interest rates on formerly revolving borrowings at a rate which is comparable to the current variable rates being paid on this debt. The remaining proceeds were utilized to repay the $2.4 million of notes payable outstanding.

On January 31, 2007, the Company completed the divestiture of Cumberland Trace Apartments for proceeds of $10.9 million, net of closing costs of $176,000. In connection with the sale, the short term note of $8.9 million was repaid. There was no gain or loss recognized on the sale.


23.	Summary of Quarterly Results of Operations (Unaudited)

(Amounts in thousand, except per share amounts)


	First			Second			Third			Fourth
Year Ended December 31, 2006	Quarter			Quarter			Quarter			Quarter

Total revenues	$	11,046		$	11,845		$	12,462		$	14,004
Operating expenses		(8,983	)		(9,719	)		(10,033	)		(11,210	)
Other income, net		(2,075	)		(2,279	)		(2,362	)		(3,042	)

Income (loss) from continuing operations		(12	)		(153	)		67			(248	)
Income from discontinued operations		184			17,457			74			2,188

Net income	$	172		$	17,304		$	141		$	1,940

Income (loss) from continuing operations, basic and diluted, per share	$	(0.00	)	$	(0.01	)	$	0.00		$	(0.02	)
Income from discontinued operations, basic and diluted, per share		0.02			1.58			0.01			0.20

Net income, basic and diluted, per share	$	0.02		$	1.57		$	0.01		$	0.18


	First			Second			Third			Fourth
Year Ended December 31, 2005	Quarter			Quarter			Quarter			Quarter

Total revenues	$	9,207		$	9,537		$	10,169		$	10,676
Operating expenses		(8,702	)		(8,530	)		(8,646	)		(21,426	)
Other income, net		(1,786	)		(1,859	)		(1,660	)		(1,741	)

Loss from continuing operations		(1,281	)		(852	)		(137	)		(12,491	)
Income from discontinued operations		300			345			3,762			21,306

Net income (loss)	$	(981	)	$	(507	)	$	3,625		$	8,815

Loss from continuing operations, basic and diluted, per share	$	(0.12	)	$	(0.08	)	$	(0.01	)	$	(1.19	)
Income from discontinued operations, basic and diluted, per share		0.03			0.02			0.36			2.03

Net income (loss), basic and diluted, per share	$	(0.09	)	$	(0.06	)	$	0.35		$	0.84

Due to the 2006 discontinued operations, amounts differ from previously filed quarterly reports.

Basic and diluted earnings per share are calculated independently for each of the quarters presented. Accordingly, the sum of the quarterly earnings per share amounts may not agree with the total year.

Schedule III

AMERICA FIRST APARTMENT INVESTORS, INC.

REAL ESTATE AND ACCUMULATED DEPRECIATION

AS OF DECEMBER 31, 2006


												Costs Capitalized
												Subsequent
								Initial Cost to Company				to Acquisition
Description										Building		Building
		Number								and		and
Property Name	Location	of Units			Encumbered			Land		Improvements		Improvements
								(In thousands)

Arbor Hills	Antioch, TN		548			(a	)	$	4,400	$	25,336	$	562
Arbors of Dublin	Dublin, OH		288			(b	)		1,750		15,085		381
Bluff Ridge Apartments	Jacksonville, NC		108			(a	)		203		3,502		85
Brentwood Oaks Apartments	Nashville, TN		262			(b	)		2,000		9,837		302
Coral Point Apartments	Mesa, AZ		337			(a	)		2,240		8,960		591
Cornerstone Apartments	Independence, MO		420			(b	)		2,150		34,513		—
Covey at Fox Valley	Aurora, IL		216			(b	)		1,320		10,028		431
Cumberland Trace	Fayetteville, NC		248			(a	)		1,175		9,162		21
Elliot’s Crossing Apartments	Tempe, AZ		247			(a	)		1,301		9,694		239
Fox Hollow Apartments	High Point, NC		184			(a	)		1,000		5,046		165
Greenbriar Apartments	Tulsa, OK		120			(a	)		648		3,673		209
Highland Park Apartments	Columbus, OH		252			(a	)		1,562		6,207		289
Huntsview Apartments	Greensboro, NC		240			(a	)		1,845		6,576		180
Jackson Park Place Apartments	Fresno, CA		296			(a	)		1,400		10,710		313
Jackson Park Place Apartments — Phase II	Fresno, CA		80			(a	)		1,425		8,807		21
Lakes of Northdale Apartments	Tampa, FL		216			(a	)		1,553		8,390		595
Littlestone of Village Green	Gallatin, TN		200			(a	)		621		9,942		228
Misty Springs Apartments	Daytona Beach, FL		128						742		3,827		252
Monticello Apartments	Southfield, MI		106						565		5,274		64
Morganton Place	Fayetteville, NC		280			(b	)		1,400		17,031		31
Oakhurst Apartments	Ocala, FL		214			(a	)		847		8,381		227
Oakwell Farms Apartments	Nashville, TN		414			(a	)		1,946		15,759		654
Shelby Heights	Bristol, TN		100			(a	)		175		2,953		41
The Exchange at Palm Bay	Palm Bay, FL		72,007	(c)		(a	)		1,296		2,483		591
The Greenhouse	Omaha, NE		126			(b	)		730		14,803		113
The Hunt Apartments	Oklahoma City, OK		216			(a	)		550		7,069		81
The Park at Countryside	Port Orange, FL		120			(a	)		647		2,617		158
The Ponds at Georgetown	Ann Arbor, MI		134						653		6,822		186
The Reserve at Wescott Plantation	Summerville, SC		192			(a	)		1,725		15,601		28
Tregaron Oaks	Bellevue, NE		300			(a	)		1,690		17,399		150
Village at Cliffdale	Fayetteville, NC		356			(b	)		1,775		19,951		24
Waterman’s Crossing	Newport News, VA		260			(a	)		1,620		12,717		249
Waters Edge Apartments	Lake Villa, IL		108						486		4,601		146
Woodberry Apartments	Asheville, NC		168			(b	)		1,174		8,842		21

								$	44,614	$	351,598	$	7,628


(a)		Property is encumbered as described in Note 8 to the Consolidated Financial Statements.

(b)		Property is encumbered and included within the credit facility described in Note 9 to the Consolidated Financial Statements.

(c)		Property is an office/warehouse facility. The figure represents square feet available for lease to tenants.


			Building
			and				Accumulated			Date of		Date		Depreciable
Property Name	Land		Improvements		Total(b),(c)		Depreciation(d)			Construction		Acquired		Life

Arbor Hills	$	4,400	$	25,898	$	30,298	$	(1,904	)		1988		2004		27.5 years
Arbors of Dublin		1,750		15,466		17,216		(453	)		1988		2006		27.5 years
Bluff Ridge Apartments		203		3,587		3,790		(335	)		1988		2004		27.5 years
Brentwood Oaks Apartments		2,000		10,139		12,139		(947	)		1986		2004		27.5 years
Coral Point Apartments		2,240		9,551		11,791		(5,196	)		1986		1991		27.5 years
Cornerstone Apartments		2,150		34,513		36,663		0			2004		2006		27.5 years
Covey at Fox Valley		1,320		10,459		11,779		(6,911	)		1987		1989		27.5 years
Cumberland Trace		1,175		9,183		10,357		0			1973		2006		27.5 years
Elliot’s Crossing Apartments		1,301		9,933		11,234		(928	)		1987		2004		31.5 years
Fox Hollow Apartments		1,000		5,211		6,211		(534	)		1987		2004		27.5 years
Greenbriar Apartments		648		3,882		4,530		(1,138	)		1985		1998		27.5 years
Highland Park Apartments		1,562		6,496		8,058		(660	)		1987		2004		27.5 years
Huntsview Apartments		1,845		6,756		8,601		(637	)		1987		2004		27.5 years
Jackson Park Place Apartments		1,400		11,023		12,423		(3,854	)		1985		1997		27.5 years
Jackson Park Place
Apartments — Phase II		1,425		8,828		10,253		(134	)		1990		2006		27.5 years
Lakes of Northdale Apartments		1,553		8,985		10,538		(850	)		1985		2004		27.5 years
Littlestone of Village Green		621		10,170		10,791		(3,292	)		1987		1998		27.5 years
Misty Springs Apartments		742		4,079		4,821		(381	)		1988		2004		27.5 years
Monticello Apartments		565		5,338		5,903		(505	)		1988		2004		27.5 years
Morganton Place		1,400		17,062		18,462		(157	)		1994		2006		27.5 years
Oakhurst Apartments		847		8,608		9,455		(1,919	)		1987		2000		27.5 years
Oakwell Farms Apartments		1,946		16,413		18,359		(4,559	)		1986		1999		27.5 years
Shelby Heights		175		2,994		3,169		(1,714	)		1987		1991		27.5 years
The Exchange at Palm Bay		1,296		3,074		4,370		(2,099	)		1988		1990		27.5 years
The Greenhouse		730		14,916		15,646		(502	)		1990		2006		27.5 years
The Hunt Apartments		550		7,150		7,700		(2,086	)		1984		1998		27.5 years
The Park at Countryside		647		2,775		3,422		(979	)		1983		1996		27.5 years
The Ponds at Georgetown		653		7,008		7,661		(662	)		1988		2004		27.5 years
The Reserve at Wescott
Plantation		1,725		15,629		17,354		(759	)		2004		2005		27.5 years
Tregaron Oaks		1,690		17,549		19,239		(909	)		1996		2005		27.5 years
Village at Cliffdale		1,775		19,975		21,750		(183	)		1990		2006		27.5 years
Waterman’s Crossing		1,620		12,966		14,586		(1,249	)		1987		2004		27.5 years
Waters Edge Apartments		486		4,747		5,233		(401	)		1988		2004		27.5 years
Woodberry Apartments		1,174		8,863		10,037		(81	)		1987		2006		27.5 years

	$	44,614	$	359,226	$	403,840	$	(46,918	)


(b)		Reconciliation of Real Estate:


	2006			2005			2004

Balance — beginning of year	$	280,192		$	283,068		$	150,591
Acquisition of real estate		139,767			36,415			145,592
Sales of real estate		(19,826	)		(39,192	)		(14,287	)
Write-off of fully depreciated assets		—			(2,185	)		—
Improvements		3,706			2,086			1,172

Balance — end of year	$	403,839		$	280,192		$	283,068

Less: Assets held for sale		(15,590	)		(24,829	)		(63,926	)

	$	388,249		$	255,363		$	219,142


(c)		As of December 31, 2006, the aggregate cost of the Company’s real estate assets for Federal income tax purposes is approximately $377.4 million.

(d)		Reconciliation of Accumulated Depreciation:


	2006			2005			2004

Balance — beginning of year	$	40,459		$	42,567		$	35,693
Depreciation expense		10,248			7,640			4,934
Write-off of fully depreciated assets		—			(2,185	)		—
Current year depreciation on discontinued operations		376			1,569			2,171
Accumulated depreciation of discontinued operations		(4,165	)		(9,132	)		(231	)

	$	46,918		$	40,459		$	42,567

Less: accumulated depreciation of assets held for sale		(401	)		(4,259	)		(11,814	)

Accumulated depreciation of continuing operations	$	46,517		$	36,200		$	30,753


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.*

There were no disagreements with the Company’s independent accountants on accounting principles and practices or financial disclosure during the fiscal years ended December 31, 2006 and 2005.


Item 9A.	*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.

Management Report On Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Generally Accepted Accounting Principles (GAAP) and includes those policies and procedures that:


	•	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

	•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and

	•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its assessment, the Company’s management believes that, as of December 31, 2006, the Company’s internal control over financial reporting was effective based on that criteria. The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on management’s assessment of the Company’s internal control over financial reporting. This report appears on the following page of this annual report on Form 10-K.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of America First Apartment Investors, Inc.

We have audited management’s assessment, included in the accompanying Management Report On Internal Control Over Financial Reporting, that America First Apartment Investors, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2006 of the Company and our report dated March 7, 2007 expressed an unqualified opinion on those financial statements and financial statement schedule.

DELOITTE & TOUCHE LLP

Omaha, Nebraska

March 7, 2007


Item 9B.	*Other Information.*

None

PART III


Item 10.	*Directors and Executive Officers of the Registrant and Corporate Governance.*

The information about directors required to be furnished pursuant to this Item 10 is incorporated by reference to the Company’s Definitive Proxy Statement for its 2007 Annual Meeting of Shareholders to be filed with the SEC pursuant to Regulation 14A within 120 days after December 31, 2006 (the “Proxy Statement”) under the heading “ELECTION OF DIRECTORS.” The information about the executive officers of the Company who are not also directors of the Company is as follows:

James J. Egan, 42, was named Chief Investment Officer of the Company in November 2005. Prior to joining the Company, Mr. Egan served as Senior Vice President for Development at ING Clarion Partners in New York. From April 1999 to July 2004, he was at DRA Advisors in New York, serving in a number of positions, including Director of Acquisitions and Development.

Paul L. Beldin, 33, was named Chief Financial Officer of the Company in December 2005. Mr. Beldin joined America First Companies as the Company’s Controller in May 2005. Prior to joining the Company, he was a senior manager at Deloitte and Touche LLP, where he was employed from August 1996 to May 2005.

Section 16(a) Beneficial Ownership Reporting Compliance

The information required to be furnished pursuant to Section 16 (a) of the Securities Exchange Act of 1934 is incorporated by reference to the Proxy Statement under the heading “Section 16(a) Beneficial Ownership Reporting Compliance.”

Code of Ethical Conduct and Code of Conduct

The Company has adopted a Code of Ethical Conduct for its senior executive and financial officers as required by Section 406 of the Sarbanes-Oxley Act of 2002. As such this Code of Ethical Conduct covers all executive officers of the Company. The Company has also adopted a Corporate Code of Conduct applicable to all directors, officers and employees which is designed to comply with the listing requirements of the NASDAQ Stock Market. Both the Code of Ethical Conduct and the Corporate Code of Conduct are available on the Company’s website at www.apro-reit.com.


Item 11.	*Executive Compensation.*

The information required to be furnished pursuant to this Item 11 is incorporated by reference to the Proxy Statement under the heading “Compensation of Executive Officers.”


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.*

The information required to be furnished pursuant to this Item 12 is incorporated by reference to the Proxy Statement under the heading “Ownership of Our Common Stock by Our Directors and Officers and Principal Shareholders” and “Equity Compensation Plan Information.”


Item 13.	*Certain Relationships and Related Transactions and Director Independence.*

The information required to be furnished pursuant to this Item 13 is incorporated by reference to the Proxy Statement under the heading “Certain Relationships and Related Transactions.”


Item 14.	*Principal Accounting Fees and Services.*

The information required to be furnished pursuant to this Item 14 is incorporated by reference to the Proxy Statement under the heading “Accounting Fees and Services.”

PART IV


Item 15.	*Exhibits, Financial Statement Schedules.*

(a) The following documents are filed as part of this report:


	1.	Financial Statements. The following financial statements of the Company are included in response to Item 8 of this report:

Reports of Independent Registered Public Accounting Firms.

Consolidated Balance Sheets of the Company and Subsidiaries as of December 31, 2006 and 2005.

Consolidated Statements of Operations and Comprehensive Income (Loss) of the Company and Subsidiaries for the three years ended December 31, 2006.

Consolidated Statements of Shareholders’ Equity of the Company and Subsidiaries for the three years ended December 31, 2006.

Consolidated Statements of Cash Flows of the Company and Subsidiaries for the three years ended December 31, 2006.

Notes to the Consolidated Financial Statements of the Company and Subsidiaries.


	2.	Financial Statement Schedules. The information required to be set forth in the financial statement schedule is included in Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2006 filed in response to Item 8 of this report.

	3.	Exhibits. The following exhibits were filed as required by Item 15(a) (3) 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).

Position Held

Position Held Since

James J. Egan

Executive Vice President, Chief Investment Officer

Paul L. Beldin

Vice President, Chief Financial Officer, Treasurer and Secretary

AMERICA FIRST APARTMENT INVESTORS INC 10-K