UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2005

or

For the transition period from            to

Commission File Number: 000-49986

AMERICA FIRST APARTMENT INVESTORS, INC.

(402) 444-1630
(Registrant’s telephone number, including area code)

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

YES þ     NO o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Exchange Act).

YES þ     NO o

     As of April 30, 2005, there were 10,510,558 outstanding shares of the registrant’s common stock.

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AMERICA FIRST APARTMENT INVESTORS, INC.

TABLE OF CONTENTS

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except shares and per share amounts)

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

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

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)

1. Organization and Basis of Presentation

America First Apartment Investors, Inc. (the “Company”) is a Maryland corporation which owns and operates 29 multifamily apartment projects and an office warehouse facility. The Company also invests in agency securities and other real estate assets.

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

The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Certain amounts from prior periods have been reclassified to conform to the current period presentation. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial position as of March 31, 2005, and the results of operations for all periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

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

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)

2. Investments in Real Estate

As of March 31, 2005 and December 31, 2004, the Company’s investments in real estate consisted of the following (in thousands):

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

3. Notes Payable

Notes payable of the Company consist of Variable Rate Junior Notes assumed in the merger with America First Real Estate Investment Partners, L.P. (“AFREZ”) in June 2004. These unsecured 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. As of March 31, 2005, such rate was 3.65%. The notes provide for annual installments of accrued interest payable on the 15^th of each January. The unpaid principal balance and accrued but unpaid interest is due January 15, 2008.

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)

4. Bonds and Mortgage Notes Payable

The Company has financed its multifamily apartment properties and its commercial property with long-term mortgage debt consisting of thirteen tax-exempt bond financings and seven taxable mortgage notes. Each debt obligation is secured by a first mortgage or deed of trust on the property. Bonds and mortgage notes payable as of March 31, 2005 and December 31, 2004 consisted of the following (in thousands):

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)

Bonds Payable:

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)

Mortgage Notes Payable:

⁽¹⁾ In January 2005, the Company entered into an interest rate swap transaction which fixed the rate on the bond to 3.44% through January 2012. The swap is accounted for as a qualifying cash flow hedge and therefore any changes in the fair value of the swap are reflected in other comprehensive income (loss) until earnings are affected by the hedged item.

⁽²⁾ The bond payable bears interest at a highly rated bond composite variable rate that is reset weekly and capped at 7.30%. The rate averaged 2.20% for the quarter and was 2.22% as of March 31, 2005.

⁽³⁾ In June 2004, the Company entered into an interest rate swap transaction with a third party under which the interest rates on these bonds are now fixed at 3.30% through June 2009.

⁽⁴⁾ The interest rate on these bonds are variable based upon the BMA average plus 0.65%.

⁽⁵⁾ The Company has an interest rate swap agreement with a third party under which the interest rate on the bond is fixed at 2.82% through February 2009.

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)

⁽⁶⁾ The Company assumed this fixed rate debt as part of the merger with AFREZ and the carrying amounts reflect the effect of determining the fair value of the debt on the merger date. Principal amounts for the debt as of March 31, 2005 are as follows: Waterman’s Crossing — $11,219; Huntsview Apartments — $6,911; Highland Park Apartments — $6,841; and Fox Hollow Apartments — $5,972.

⁽⁷⁾ This mortgage note payable matures in less than one year. At the current time, the Company will either refinance or pay this debt in full upon its maturity.

⁽⁸⁾ Bond payable bears interest at a highly rated bond composite variable rate that is reset weekly and capped at 12%, the rate at March 31, 2005 was 2.02% and the average for the quarter was 2.14%.

5. Borrowings under Repurchase Agreements

Borrowings under repurchase agreements as of March 31, 2005 and December 31, 2004 consisted of the following (in thousands):

The Company intends to renew its repurchase agreements which come due in 2005 with repurchase agreements having similar terms.

6. Transactions with Related Parties

Advisory Agreement

America First Apartment Advisory Corporation (the “Advisor”) operates under an Advisory Agreement (“the Agreement”) with the Company, which includes the following provisions: (i) the Advisor will administer the day-to-day operations of the Company; (ii) the Advisor will act 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 will provide the executive and administrative personnel and services required for the operation of the Company; (iv) the Advisor will maintain the financial records and perform the financial reporting of the Company; and (v) the Advisor will monitor and provide information to the Board of Directors on an on-going basis. In connection with these services, the Company pays the following administrative fees to the Advisor:

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)

Administrative Fee — General
This fee is equal to 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 then held by the Company; (iii) the outstanding principal of mezzanine financing provided by the Company to unaffiliated developers of residential real estate, plus (iv) the value of the AFREZ properties on the date of the merger of AFREZ with and into the Company. Such fees were $367,000 for the three month period ended March 31, 2005, and $221,000 for the three month period ended March 31, 2004, respectively, and are included in General and administrative expenses in the Consolidated Statements of Operations.

Administrative Fee — Agency Securities
This fee is equal to 0.25% per annum of the outstanding principal balance of all agency securities held by the Company with 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 exceeds the average dollar amount of stockholders’ equity invested in agency securities during the month times the composite dividend yield reported by the National Association of Real Estate Investment Trusts for equity REITs which invest in residential apartment properties (5.18% for the month ended March 31, 2005). Such fees were $31,000 for the three month period ended March 31, 2005, and $61,000 for the three month period ended March 31, 2004, respectively, and are included in interest income on cash and cash equivalents and agency securities and dividend income in the Consolidated Statements of Operations.

Property Acquisition Fee
In connection with the identification, evaluation and acquisition of real estate assets, the Advisor receives a fee in the amount of 1.25% of the gross purchase price paid by the Company for such real estate assets. As there were no acquisitions of real estate during the three months ended March 31, 2005 and March 31, 2004, no such fees were paid during those periods.

Mezzanine Investments Fee
Effective with the amendment of the Agreement on June 3, 2004, in connection with the underwriting and making of mezzanine investments, the Advisor receives a fee in the amount of 1.25% of the original principal amount of such mezzanine investments. As there was no underwriting or making of mezzanine investments during the three months ended March 31, 2005 and March 31, 2004, no such fees were paid.

Reimbursement of Out-of-Pocket Expenses
The Company reimburses the Advisor and its affiliate for certain out-of-pocket costs and expenses that it incurs in connection with the carrying out of the Company’s business activities. The total amount of such costs and expenses for the period ended March 31, 2005 and March 31, 2004 was $560,000 and 210,000, respectively.

Included in Accounts payable and accrued expenses in the Consolidated Balance Sheets are amounts due to the Advisor and its affiliate for administrative fees and reimbursed costs and expenses of approximately $425,000 and $162,000 as of March 31, 2005 and December 31, 2004, respectively.

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)

Property Management Fees
In the prior year, an affiliate of the Advisor, America First Properties Management Company L.L.C. (“AFP”), 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. 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 AFP and its parent, America First Companies, L.L.C. (“America First Companies”). As a result of this transaction, the management of all of the Company’s properties was internalized and therefore no further management fees will be incurred. For the period ended March 31, 2004, fees of $245,000 were incurred by multifamily properties owned by the Company. In addition, the Company assumed the management of certain properties owned by unaffiliated parties and earns fee income for providing management services for these properties.

7. Stock Option Plan

The Company adopted a Stock Option Plan (the “Plan”) on April 1, 2002 to permit awards of equity based compensation to those providing services to the Company. The Plan is administered by the Compensation Committee of the Board of Directors. The Plan allows for the granting of options to purchase an aggregate of up to 750,000 shares of the Company’s common stock. The Plan authorizes the Board of Directors and its Compensation Committee to grant Incentive Stock Options (“ISOs”), as defined under section 422 of the IRS Code, non-qualified stock options (“NQSOs”), and dividend equivalent rights (“DERs”) to eligible persons. The exercise price for options granted under the Plan shall not be less than the fair market value of the Company’s common stock on the date of the grant. Options granted under the Plan expire 10 years from the respective grant dates of the options.

On February 4, 2003, NQSOs to acquire a total of 40,000 shares of common stock were granted to the Company’s four non-employee Directors, at an exercise price of $8.73. The options vest 25% on the grant date and 25% on each of the next three anniversaries of the grant date. On the same date, a total of 40,000 DERs were granted to the Company’s four non-employee directors, which vest 25% on the grant date and 25% on each of the next three anniversaries of the grant date.

Stock option activity for the three month period ended March 31, 2005 is summarized as follows:

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)

As of March 31, 2005, all outstanding options have an exercise price of $8.73 and a remaining contractual life of 7.85 years. The Company accounts for its stock options using the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under SFAS No. 123, the Company records compensation expense based upon the estimated fair value of its granted options, over their vesting period. The per share estimated fair value of the options granted on their grant date during the quarter ended March 31, 2003 was $2.19. The estimated fair value of the Company’s options was determined using the Black-Scholes option-pricing model with the following assumptions: a risk free interest rate of 3.24%, an expected remaining contractual life of 5.0 years and an expected volatility rate of 20%. Compensation expense for stock options was $4,000 and $5,000 for the quarter ended March 31, 2005 and 2004, respectively. Payments on the DERs for options not exercised are charged to earnings when declared and were $4,000 and $5,000 for the quarters ended March 31, 2005 and 2004, respectively.

8. Net Income (Loss) Per Share

For the three months ended March 31, 2005 and 2004, the stock options were excluded from the computation of diluted net income (loss) per share due to their antidilutive effect. There were 30,000 potentially dilutive securities as of March 31, 2005.

9. Segment Reporting

The Company’s reportable segments consist of: (i) its multifamily apartment properties; (ii) its commercial property; (iii) its investment in agency securities, and (iv) other, which includes Company overhead and consolidating entries.

The Company defines each of its multifamily apartment properties as an individual operating segment. It has determined that all multifamily apartment properties have similar economic characteristics and meet the other criteria which permit the multifamily apartment properties to be aggregated into one reportable segment, that being the acquiring, holding, operating and selling of multifamily apartment properties. The Company’s chief operating decision-makers assess and measure segment operating results based on net income.

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

The Company assesses the performance of its investment in agency securities based on its net income earned on these securities. Net income is calculated as agency securities interest income, less premium amortization, interest expense incurred on the financing used to acquire these securities and administrative and incentive fees. All of the Company’s agency securities are combined into one reportable segment for this purpose.

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

The following table details certain key financial information for the Company’s reportable segments for the quarter ending March 31, 2005 and 2004 (in thousands):

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)

10. Commitments and Contingencies

On December 3, 2003, a purported class action lawsuit was filed in the Delaware Court of Chancery against AFREZ, along with its general partner and America First Companies L.L.C. (“America First”). The plaintiffs seek to have the lawsuit certified as a class action on behalf of all Units holders. The lawsuit alleges, among other things, that the defendants acted in violation of their fiduciary duties to the Unit holders in connection with the merger of AFREZ with and into the Company. The merger of AFREZ with and into the Company was completed on June 3, 2004 and, as a result, the Company assumed all liabilities of AFREZ, including any liability that may be imposed as a result of this lawsuit. To date, the plaintiffs have not amended their complaint to formally name the Company as a defendant or to modify the relief they are seeking. The Company intends to defend this lawsuit vigorously, but is unable to predict the outcome of this litigation.

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

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

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

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 1 of the Company’s Annual Report on Form 10-K as of December 31, 2004.

Critical Accounting Policies

The Company’s critical accounting policies are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

General

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. which merged with the Company as of January 1, 2003.

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 located in Arizona, Florida, Illinois, Michigan, North Carolina, Ohio, Tennessee and Virginia.

The following table sets forth certain information regarding the Company’s real estate properties as of March 31, 2005 and for the three months then ended:

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Executive Summary

The financial results of the Company reflect the effects of the soft market conditions being experienced by the multifamily housing industry which are attributable to three primary factors: (i) economic conditions in certain markets that have significantly weakened rental rates; (ii) overbuilding of multifamily housing properties; and (iii) record low interest rates that are making home ownership a reality to prospective tenants. In response to these conditions, management will continue to focus on the attraction and retention of quality tenants, and on the effective cost management of operating expenses.

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 four high level performance measures management uses to gauge the overall performance of our property portfolio.

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Physical occupancy, Economic occupancy and the average annual rent per unit are performance measures that provide management an indication as to the quality of rental revenues. Physical occupancy is calculated simply as the percentage of units occupied out of the total units owned. Economic occupancy is calculated as the net rental revenue divided by the gross potential rental revenue which could be derived from the property portfolio. Economic occupancy is reflective of vacancy, rental concessions, delinquent rents, bad debts and non-revenue units such as model units. The average annual rent per unit is calculated as the total annualized net rental revenue divided by the total number of units owned. The fourth measure is real estate operating margin and is calculated as the net operating margin for the property portfolio as a percentage of net rental revenues and provides management an indication as to the ability of the properties to manage operating expenses in the current occupancy environment.

The following table presents these measures as of the dates indicated.

We believe that recent economic and job growth in the United States has had a positive impact on the market conditions for the multifamily housing industry. The second half of 2004 and the first quarter of 2005 saw positive momentum in terms of property performance.

Results of Operations

The following discussion of the Company’s results of operations for the three months ended March 31, 2005 should be read in conjunction with all of the consolidated financial statements and notes thereto included in Item 1 of this report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Three Months Ended March 31, 2005 Compared to the Three Months Ended March 31, 2004

Changes in Results of Operations

     Rental revenues. An increase of approximately $4.6 million is attributable to the three months of revenues from the properties acquired through the merger with AFREZ. Additionally, $900,000 of rental revenues can be attributed to the acquisition of Arbor Hills in December of 2004. The rental revenues generated by the properties held by the Company prior to the merger with AFREZ increased approximately $200,000 compared to the same period in 2004.

     Interest and dividend income. The slight decrease is primarily attributable to the principal prepayments on the agency securities portfolio. At March 31, 2004, the portfolio was carried at $35.1 million compared to $24.4 million at March 31, 2005. This decrease is offset by an increase in interest earned due to an increase in cash and cash equivalents and an increase in dividends due to the increase in corporate equity securities acquired in the merger with AFREZ.

     Real estate operating expenses. The majority of the increase, approximately $2.2 million, is attributable to the acquisition of fourteen additional properties through the merger with AFREZ and the inclusion of the real estate operating expenses of these properties for the quarter. Approximately $400,000 of the increase can be attributed to the acquisition of Arbor Hills in December of 2004. These increases were partially offset by the elimination of management fees, which amounted to $245,000 during the period ending March 31, 2004, due to the internalization of the property management operations. Without the internalization of the property management operations, management fees would have been substantially higher in 2005 due to the fourteen additional properties acquired in the AFREZ merger. Salaries and benefit related costs associated with the internalized property management operations are reflected in general and administrative expenses for the period ending March 31, 2005.

     Depreciation expense. Approximately $800,000 of the increase is attributable to the acquisition of fourteen additional properties through the merger with AFREZ and the inclusion of the depreciation expense of these properties for the quarter. In addition, depreciation increased approximately $200,000 due to the purchase of Arbor Hills in December of 2004. Depreciation expense incurred by the properties held by the Company

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

prior to the merger with AFREZ was consistent with the depreciation expense incurred during the same period in 2004.

     Interest expense. 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. All of the increase in interest expense for the period is attributable to the three months of interest expense on borrowings assumed through the merger with AFREZ.

     General and administrative expenses. The majority of the increase is attributable to the merger with AFREZ and the internalization of the property management operations. Salaries and benefit related costs accounted for approximately $670,000 of the increase in general and administrative expenses of which approximately $345,000 related to severance payments and approximately $150,000 related to internalization of the property management operations. Additionally, general and administrative fees were impacted by an increase in administrative fees of approximately $167,000.

     Amortization expense. Amortization expense includes the amortization of in-place lease intangibles and debt financing costs. This increase is primarily attributable to the amortization of the in-place lease intangibles recorded as a result of the merger with AFREZ.

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.

The Company’s FFO increased $1.3 million or 106% to $2.6 million for the first quarter of 2005, compared to $1.3 million for the same period in 2004. This is primarily due to the inclusion of three months of operations of the fourteen properties acquired in the merger with AFREZ and by Arbor Hills, which was acquired in December of 2004. This is partially offset by the increased salaries and related benefits from corporate staff additions due to the internalization of the property management operations in November of 2004.

FFO is calculated 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 to the Company’s net income. 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.

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

While the Company uses the NAREIT definition of FFO, the Company’s FFO may not be comparable to other REITs or real estate companies with similar assets. This is due in part to the differences in capitalization policies used by different companies and the significant effect these capitalization policies have on FFO. Real estate costs incurred in connection with real estate operations which are accounted for as capital improvements are added to the carrying value of the property and depreciated over time whereas real estate costs that are expensed are accounted for as a current period expense. This affects FFO because costs that are accounted for as expenses reduce FFO. Conversely, real estate costs that are capitalized and depreciated are added back to net income to calculate FFO. Throughout 2004 and prior to 2004, the Company’s capitalization policy was to treat most recurring capital improvements, such as appliances, vinyl flooring and carpet as expenses, and this may cause the Company’s reported FFO to be lower than peer companies that capitalize recurring improvements of these types.

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 or net cash flows from operating activities which are calculated in accordance with GAAP.

Beginning in 2005, the Company modified its capitalization policy. The Company now capitalizes the appliances within the individual units including such items as ovens, refrigerators and water heaters. These items were previously expensed as incurred. The Company will continue to expense items such as carpet and vinyl flooring as incurred. The Company has also modified its policy to reduce specific thresholds for capitalizing certain items. These modifications occurred in 2005 and will only affect newly acquired assets on a prospective basis. This change will be accounted for as a change in accounting estimate on a prospective basis.

Liquidity and Capital Resources

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

The Company uses cash primarily to (i) pay the operating expenses of its multifamily apartment properties, including the cost of capital improvements and, prior to November 2004, fees paid to the property manager; (ii) to pay the operating expenses of the Company’s administration, including the fees paid to its Advisor; (iii) the payment of debt service on its bonds and mortgages payable; (iv) the acquisition of additional multifamily apartment properties, agency securities and other investments; and (v) the payment of dividends. Currently, the Company’s cash provided by operations is insufficient to maintain the necessary level of capital improvements and to fully fund the current level of dividends. While the Company has the ability to fund the current level of dividends through other means, including proceeds from the sale of properties, continued weakness in operating cash flows could negatively impact dividend rates. The Company expects to maintain dividends at the current rate of $0.25 per share per quarter.

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 Form S-3 registration statement for $200 million of capital stock which may be sold

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

from time to time in order to raise additional equity capital in order to support the Company’s business strategy. To date, no securities have been sold under this registration statement.

In addition to the funds that the Company may raise through the issuance of additional equity capital, it may also be able to borrow money to finance the acquisition of additional real estate assets. Borrowing to acquire additional multifamily apartment properties is generally in the form of long-term taxable or tax exempt mortgage loans secured by the acquired properties. The amount of debt the Company can incur is not limited by its charter or otherwise. In general, however, the amount of borrowing used to finance the overall multifamily apartment property portfolio is approximately 55% to 65% of the purchase price of these assets, although higher or lower levels of borrowings may be used on any single property.

The multifamily apartment properties which the Company currently owns are financed under twenty mortgage financings with an aggregate principal balance outstanding of approximately $166.8 million as of March 31, 2005. These mortgages consist of thirteen tax-exempt bonds with an aggregate principal balance outstanding of approximately $111.3 million and seven taxable mortgage notes payable with a combined principal balance of approximately $55.5 million. Eleven of these mortgage obligations, totaling approximately $76.4 million, require periodic payments of principal and interest while the remaining ten mortgage obligations require only periodic payments of interest. Approximately 69% of these mortgage obligations bear interest at a fixed rate with a weighted average interest rate of 5.8% for the three months ended March 31, 2005. The remaining 31% of these mortgage obligations bear interest at variable rates, via interest rate swap agreements, that had a weighted average interest rate of 2.03% for the three months ended March 31, 2005. Maturity dates on these mortgage obligations range from September 2005 to July 2031. Each of these mortgage loans has been made on a non-recourse basis, which means the lender’s source of payment in the event of default is limited to foreclosure of the underlying property securing the mortgage loan.

In addition, the Company has borrowings in the form of Notes payable and borrowings under repurchase agreements. 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 for the three month period of 3.25%. These Notes payable are due January 15, 2008. The borrowings under repurchase agreements bear interest at fixed rates with a weighted average interest rate of 2.32% for the three months ended March 31, 2005 and mature within one year.

Acquisitions of agency securities are principally financed with repurchase agreements. Repurchase agreements take the form of a sale of a security (in this case, an Agency Security owned by the Company) 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 additional 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. As of March 31, 2005, the Company had borrowed approximately $20.9 million under short-term repurchase agreements to finance its investment in agency securities. These repurchase agreements have a weighted average interest rate of 2.28% and a weighted average

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

maturity of 136 days. Total borrowings to acquire agency securities are currently limited by the Company to not more than eight times the amount of equity capital invested or set aside for investment by the Company in agency securities, although the Company can increase this limitation with the approval of the Board of Directors.

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 three months ended March 31, 2005 increased by $1.3 million compared to the same period a year earlier. Cash provided by investing activities increased $1.1 million for the first quarter of 2005 compared to the same period in 2004 due to the purchase of agency securities during the first quarter of 2004. Net cash used in financing activities for the three months ended March 31, 2005 increased $1.4 million compared to the same period a year earlier. This was due to an increase in dividends paid due to the increased number of shares outstanding as a result of the merger with AFREZ.

Dividends paid or accrued per share for the three months ended March 31, 2005 and 2004 were $0.25 for each respective period.

Contractual Obligations

The Company had the following contractual obligations as of March 31, 2005:

The company is also contractually obligated to pay interest on its long-term debt obligations. The weighted average interest rate of the long-term debt obligations outstanding as of March 31, 2005 was approximately 5.3% for fixed-rate debt and 2.49% for variable-rate debt.

The Company will either refinance or pay the notes payable that is due in 2005. The Company intends to renew its repurchase agreements which come due in 2005 with repurchase agreements having similar terms.

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

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

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

As of March 31, 2005, the aggregate principal of the Company’s total borrowings was $197.1 million. Approximately 73% of the Company’s total borrowings consisted of fixed-rate financing. The remaining 27% 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 three months ended March 31, 2005, interest expense on the Company’s variable-rate debt financing would have increased or decreased by approximately $134,000, respectively.

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 borrowings (in thousands):

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

As of March 31, 2005, the Company had entered into the following derivative financial instruments.

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

⁽²⁾ Weighted average Bond Market Association rate for the three months ended March 31, 2005.

⁽³⁾ Weighted average Bond Market Association rate for the three months ended March 31, 2005 plus 0.65%.

⁽⁴⁾ Capped rate is tied to the weighted average Bond Market Association rate for the month.

⁽⁵⁾ These are total return swaps.

The $8,100,000 variable to fixed swap was entered into on top of and to mitigate the variable rate risk of the fixed to variable swap maturing January 22, 2009. It effectively fixes the interest rate on $8,100,000 of bonds payable at 2.82% through February 3, 2009.

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

The $10,910,000 variable to fixed swap was entered into on top of and to mitigate the variable rate risk of those fixed to variable swaps maturing July 13, 2009. It effectively fixes the interest rate on $10,910,000 of bonds payable at 3.30% through June 25, 2009.

The estimated fair value of the interest rate swap agreements consisted of an asset of $506,000 and a liability of $371,000 as of March 31, 2005.

As the above table incorporates only those exposures or positions that existed as of March 31, 2005, it does 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.

Prepayment Risk on Agency Securities

As the Company receives repayments of principal on its agency securities, premiums paid on such securities are amortized against interest income. Premiums arise when the Company acquires agency securities at a price in excess of the principal balance of the mortgages securing such agency securities or the par value of such agency securities if purchased at the original issue. For financial accounting purposes interest income is accrued based on the outstanding principal balance of the investment securities and their contractual terms. Purchase premiums on the Company’s agency securities are amortized against interest income over the lives of the securities using the effective yield method, adjusted for actual prepayment activity. In general, an increase in the prepayment rate will accelerate the amortization of purchase premiums, thereby reducing the yield/interest income earned on such assets.

Cash Concentrations of Credit Risk

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.

Item 4. Controls and Procedures.

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

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

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

On December 3, 2003, a purported class action lawsuit was filed in the Delaware Court of Chancery against America First Real Estate Investment Partners, L.P. ( “AFREZ”), along with its general partner and America First Companies, L.L.C., by Harvey Matcovsky and Gloria Rein, in their capacities as holders of assigned limited partner interests (“Units”) of AFREZ. The plaintiffs seek to have the lawsuit certified as a class action on behalf of all Units holders. The lawsuit alleges, among other things, that the defendants acted in violation of their fiduciary duties to the Unit holders in connection with the merger of AFREZ with and into the Company. The plaintiffs were seeking to enjoin the proposed merger and also seek unspecified damages and costs. On February 5, 2004, the defendants filed an Answer denying all material allegations and asserting several affirmative defenses. The merger of AFREZ with and into the Company was completed on June 3, 2004 and, as a result, the Company assumed all liabilities of AFREZ, including any liability that may be imposed as a result of this lawsuit. To date, the plaintiffs have not amended their complaint to formally name the Company as a defendant or to modify the relief they are seeking. The Company intends to defend this lawsuit vigorously, but is unable to predict the outcome of this litigation. There are no other material pending legal proceedings to which the Company is a party or to which any of its properties is subject.

Item 6. Exhibits.

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

2.1 Agreement and Plan of Merger, dated 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).

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

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

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

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

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

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

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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

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

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

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SIGNATURES

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

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