Rod Smith
Executive Vice President, Chief Financial Officer and Treasurer at American Tower
Thanks, Tom. Good morning, and thank you to everyone for joining today's call. As you saw in today's press release, we delivered another quarter of strong performance across our global business. Before walking through the details of our Q2 results and revised outlook, I'll touch on a few highlights from the quarter along with the financing initiatives we've executed over the last several months. First, we've announced and partially closed our plans to raise approximately $4.8 billion in equity financing in support of our CoreSite acquisition, beginning with our common equity issuance in early June and later through our announced agreement with Stonepeak in our U.S. data center business. With these two transactions, not only have we addressed our equity financing requirement for CoreSite but we've accomplished it in a manner that maximizes shareholder value and supports our investment-grade credit ratings. Further, through our partnership with Stonepeak who brings tremendous expertise in communications infrastructure and has a like-minded long-term investment philosophy, we've created a platform to further evaluate and finance growth opportunities across our U.S. data center business as the 5G ecosystem further develops. Moreover, we believe Stonepeak's investment represents a full valuation relative to what we have invested in our U.S. data center portfolio today, and allows American Tower to retain operational control as well as the flexibility to execute on our mobile edge strategy.
I'll discuss this transaction in more detail later. Second, we also continue to strengthen our balance sheet by leveraging the debt capital markets, raising $1.3 billion in senior unsecured notes at attractive terms. As a result of our Q2 financing activities and pro forma for our private capital proceeds, which we expect to use to pay down short-term floating rate debt, we will increase our percentage of fixed debt to nearly 80%, up from 66% as of the end of Q1, and bring pro forma net leverage down to approximately 5.5 times. With our CoreSite financing now largely complete, we remain committed to organically delevering back below five times over the next couple of years. Third, we see strong secular trends driving increased network coverage and densification initiatives among our customers, continuing to translate solid gross new business globally, including the need for more cell sites internationally as Tom just highlighted, evidenced by the success of our new build program. We constructed over 1,500 sites in Q2, representing the 12th quarter of over 1,000 new builds since the start of 2019, a demonstration of the success of our capabilities and expertise, scaled market positions and strong customer relationships.
Additionally, demand remains robust for our differentiated interconnection-rich U.S. data center campuses as customers leverage the dynamically scalable solutions and interoperability provided by CoreSite's national ecosystem, leading to another strong quarter of new and expansion leasing. And finally, our first half performance and confidence in our full year outlook and long-term targets amid heightened market volatility, rising inflation and operational challenges is a testament to the resiliency of our business and the stability of the earnings we consistently generate. This is made possible through operational excellence and service dependability. Our investment-grade balance sheet, the strength of our underlying contracts, including international revenues supported by CPI-linked escalators, the ability to pass through a substantial portion of our direct costs across our international regions and the matching of escalator terms in the U.S. between customer and land leases, and more importantly, the mobile data trends driving unabated demand for our communications assets. With that, please turn to slide six, and I'll review our Q2 property revenue and organic tenant billings growth. As you can see, our Q2 consolidated property revenue of $2.6 billion grew by over 17% and nearly 19% on an FX-neutral basis over the prior year period. In the U.S. and Canada, property revenue was roughly flat due to the continued effects of Sprint churn, while international growth stood at roughly 19% or nearly 23%, excluding the impacts of currency fluctuations, and includes about 12% contributed by the Telxius assets.
In addition, our U.S. data center business contributed nearly $190 million of growth in the quarter. These growth rates are indicative of the strong secular demand drivers that underpin growth on our communications infrastructure assets across the globe as 4G and 5G deployments continue. Moving to the right side of the slide, you can see we achieved consolidated organic tenant billings growth of 2.6% for the quarter. In the U.S. and Canada, as expected, organic growth was slightly negative at 0.4%, including a sequential step down in gross organic new business on a dollar basis associated with the timing of certain MLA use fee commencements in 2021, which we guided to during our Q1 call. We continue to expect a reacceleration in gross new business in the back half of the year. Escalators were 2.8%, which, as we also highlighted last quarter, were impacted by certain timing mechanics within our MLAs. Though for the full year, we expect escalators to come in right around 3%, consistent with historical trends. This growth was offset by the impacts of Sprint churn, which continues to drive over 4% of negative headwind year-over-year. On the international side, organic growth was 7.8%. Starting with Europe, we saw growth of 11.2%, which remains elevated given contributions from the Telxius portfolio, which were only partially included in our Q2 2021 base. Absent Telxius, our legacy European business grew roughly 6%, an expansion of approximately 160 basis points as compared to our Q2 2021 growth rates. In Africa, we generated organic tenant billings growth of 9%, which includes 8% in gross organic new business contributions, our highest quarter on record.
The continued strength in new leasing activity in the region was complemented by the construction of just over 400 sites in the quarter. As we see 4G coverage and densification initiatives continue to drive strong top line growth and returns across the region. Moving to Latin America. Organic growth was 8.3%, which includes approximately 8.7% from escalations. Consistent gross organic leasing growth was offset by expected elevated churn, primarily associated with certain decommissioning agreements as highlighted on previous earnings calls. For both Africa and Latin America, as we look to the second half of the year, we expect a step down relative to the first half in net organic growth rates due to anticipated consolidation-driven churn, which remains consistent with our prior outlook assumptions. In APAC, we saw organic growth of 3.9%, in line with our expectations and representing our fourth consecutive quarter of positive growth, which comes alongside a continuation of solid new build activity with nearly 1,000 sites constructed during the quarter. It's important to note that although we remain encouraged by the positive trends we're seeing in our APAC growth rates, we do anticipate a modest sequential step down in Q3 to the low single-digit range before recovering in Q4 to near the upper end of our 2% to 3% full year guide, which remains unchanged. Turning to slide seven. Our second quarter adjusted EBITDA grew just over 13% or over 14% on an FX-neutral basis to approximately $1.7 billion. Adjusted EBITDA margin was 62.5%, down 170 basis points over the prior year, driven by the lower margin profile of newly acquired assets, the conversion impacts of commenced Sprint churn, along with higher pass-through revenue resulting from rising fuel costs. Moving to the right side of the slide, attributable AFFO and attributable AFFO per share grew by 7% and 5%, respectively. Growth was meaningfully impacted by Sprint churn and the timing of cash taxes, which together provided a negative headwind of nearly 7%. Let's now turn to our revised full year outlook, where I'll start by reviewing a few of the key high-level drivers.
First, our core operating performance remained strong across our business, allowing us to raise our AFFO per share guidance for the year and increase our expectations on an FX-neutral basis for property revenue and adjusted EBITDA. Second, we have revised our FX assumptions using our standard methodology which has resulted in outlook-to-outlook headwinds of approximately $100 million, nearly $50 million, $40 million and roughly $0.08 for property revenue, adjusted EBITDA, consolidated AFFO and AFFO per share, respectively. Finally, we have updated our CoreSite financing assumptions to reflect our completed common equity issuance and our anticipated close of private capital funding. This update has resulted in a reduction in our total equity requirement, balanced with the incremental debt and associated interest costs. Additionally, we have contemplated the minority interest impacts related to the Stonepeak partnership and updated closing assumptions, all of which I will address in more detail in a moment. With that, let's discuss the details of our revised full year expectations. As you can see on slide eight, we are continuing to project consolidated year-over-year property revenue growth of nearly 14% at the midpoint. The $15 million decrease relative to prior guidance is driven by the FX headwinds I previously mentioned, which were partially offset by over $40 million in core property revenue outperformance.
Taking the benefits of CPI in our international escalators and accelerated decommissioning-related settlements, together with upside in our U.S. and Canada and data center segments and over $40 million in other outperformance primarily driven by higher international pass-through revenue due to elevated fuel costs. Moving to Slide 9, you will see our organic tenant billings growth projections, which have been slightly revised since our last earnings call. While our expectations remain consistent in the U.S. and Canada, international and on a consolidated basis, we have made some adjustments within our specific international segments. In Europe, we have adjusted our growth back to approximately 9%, reflecting our expectations for a temporary shift in new business commencement timing from the back half of 2022 into 2023. Demand remains very solid in the region, setting us up well as we exit 2022. You will also see that we have modestly raised the guidance for Latin America to approximately 7% and Africa to approximately 6.5%, both up from previous expectations of greater than 6%, reflecting a continuation of escalation benefits from CPI. Moving to slide 10, we are lowering our adjusted EBITDA outlook by $20 million as compared to our prior outlook, driven again by negative FX impacts, with expected growth of approximately 10% year-over-year. While we are seeing a strong conversion of core property revenue upside to cash margin outperformance, we have taken a revised view on SG&A, notably on bad debt reversal expectations for the year.
Although collection trends were solid in Q2, we have pushed out some of our assumptions related to the incremental collections associated with previously reserved balances that we continue to expect to collect in time. Turning to Slide 11. We are raising our attributable AFFO per share guidance to $9.74, up from $9.72, despite absorbing the negative effects from FX and a continued rise in interest rates. To better understand the components in our revised outlook bridge, I'd like to spend a moment to walk through the moving pieces of the guidance associated with our updated equity plan and the mechanics of our Stonepeak partnership, which consists of $1.75 billion in common equity and $750 million in mandatory convertible preferred equity for a total ownership interest of 29% on a fully convertible basis in our U.S. data center business. First, as I mentioned, we were able to reduce our total equity requirements from approximately $5.5 billion to $4.8 billion, including $2.3 billion of common equity proceeds, which meaningfully reduced our share issuance to approximately 9.2 million shares. The reduction in equity resulted in an increase to our debt balances which, together with the revised timing of the equity raise along with the elevated interest rates, has driven an increase to our interest expense look, which largely makes up the over $50 million other reduction to AFFO as compared to our prior outlook. Next, regarding our Stonepeak partnership, the financial impacts for the minority investment will appear in two places.
First, the coupon of $750 million of mandatorily convertible preferred equity with a cost in the mid-single-digit percent range will be recognized as a deduction to the AFFO generated by our data center segment and reflected in our consolidated AFFO, which represents approximately $14 million in our 2022 guide, as shown on the slide. Second, until conversion of their preferred equity, which is expected to occur four years from the date of closing, Stonepeak's initial common equity stake in our data center business will stand at 23%, which contemplates approximately $2 billion of net debt on the U.S. data center business and will be considered as a minority interest deduction for attributable AFFO purposes, equating to approximately $20 million in our 2022 outlook. Please note, we have also reduced the European minority interest assumption from $160 million previously to $150 million, largely due to FX. Together, we are now guiding to a minority interest adjustment of $170 million in 2022. Finally, as I mentioned earlier, our updated outlook also takes into consideration updated equity closing assumptions. We previously assumed a May closing for our common equity issuance, which actually occurred in early June. We also assumed our private capital will close in mid-Q3, with planned proceeds to be used to pay down short-term floating rate debt. Taken all together, our revised CoreSite financing plan drove approximately $0.06 of incremental accretion relative to our prior attributable AFFO per share outlook, which includes a negative hit of roughly $0.03, driven by higher interest rates on our debt financing relative to our previous assumptions. Moving to slide 12.
Let's look at our capital deployment expectations for 2022, which are updated compared to our prior outlook while continuing to reflect our focus on driving strong, sustainable AFFO per share growth. First, we now expect to dedicate approximately $2.7 billion subject to Board approval towards our 2022 dividends. This is down slightly from our previous guidance of $2.8 billion, which is simply a function of our reduced common equity issuance and continues to represent approximately 12.5% in year-over-year growth on a per share basis. In regards to capex, we are decreasing our outlook midpoint by $60 million in total, with development capex increasing $15 million and with redevelopment capital and land acquisition spend decreasing $25 million and $50 million, respectively. Our development plan continues to assume the construction of approximately 6,500 new sites globally at attractive returns. In fact, on the nearly 3,000 sites constructed in the first half of 2022, we saw a day one NOI yield of roughly 14%. Lastly, we continue to expect to direct roughly $300 million towards our U.S. data center business, largely associated with development spend. Now turning to Slide 13. And with our CoreSite financing plan largely complete, I will briefly touch on the strength of our investment-grade balance sheet, which is fundamental to the execution of our Stand and Deliver strategy. Our long-stated financial policies, including establishing optimal levels of leverage and an appropriate mix of debt instruments, guide the management of our capital structure. Which, together with our strong business fundamentals, provide American Tower with continued access to capital markets at attractive terms.
As you recall, American Tower proactively accessed the debt capital markets in 2021, taking advantage of historically low pricing, raising roughly $3 billion in senior unsecured notes in the second half of the year at a blended cost of approximately 1.6%. With our fixed debt percentage at the time rising to over 85%, this effectively allowed us to lock in low-rate debt for future strategic initiatives, including the CoreSite acquisition, which in turn reduced our dependency on the debt markets in 2022 as part of our final financing plan. We believe the strategic and efficient management of our balance sheet puts us in a strong position as we close out 2022 and look beyond. As of the end of the second quarter, a pro forma for the close of the Stonepeak investment in our U.S. data center business, our average cost of debt stands at about 2.6% with an average remaining tenure of over six years. Since 2010, we have reduced our average cost of debt by approximately 250 basis points and increased our average debt tenure by about one year by accessing the long part of the yield curve, proactively refinancing our debt and capitalizing on low rate environments. In addition, and more recently, we also focused on diversifying and expanding our capital sources and structure by issuing euro-denominated debt, establishing our ATM program, and efficiently executing on public equity raises and partnership agreements with leading global private investors.
With a strong liquidity position of approximately $6.7 billion on a pro forma basis, inclusive of Stonepeak proceeds and other financing activities subsequent to the quarter end, in a staggered maturity profile, we feel well positioned moving forward as we focus on organically deleveraging back to within our normal net leverage range over the next couple of years. Taken all together, we see the strength of our financial position as a competitive advantage for American Tower, whether executing on our growth strategy, navigating economic downturns or volatility in the financial markets, and we remain focused on and committed to our thoughtfully-established financial policies that have guided our financial strategy for the past decade. Finally, on slide 14 and in summary, Q2 was another solid quarter supported by leasing demand across our global portfolio of communications assets, strong execution of capital markets initiatives including financing for the CoreSite acquisition, and meaningful, high-yielding new asset development activity. Our high-quality set of assets and established market positions continue to benefit from secular demand trends driving 4G and 5G initiatives across our global footprint, while the strength of our balance sheet and cash flows has us well positioned to manage and grow the business through potential market volatility and uncertainty. As we look to the back half of the year, we are excited about our growth trajectory and remain focused on executing on our strategic initiatives, which support our long-term double-digit AFFO growth aspirations.
With that, I'll turn the call back over to the operator for Q&A.