Rod Smith
Executive Vice President, Chief Financial Officer and Treasurer at American Tower
Thanks, Tom. Good morning, and thank you for joining today's call. As you saw in our press release, we had a strong second quarter, reflecting a continuation of resilient demand for our diversified global portfolio and solid operational execution across our organization. Before I walk through the details of our Q2 results and revised full year outlook, I'll start with highlighting a few items from the quarter. First, we continue to strengthen our balance sheet, raising approximately $2.7 billion in fixed rate debt through a combination of euro and U.S. dollar-denominated senior notes at a weighted average cost of 4.9%. As a result, we decreased our exposure to floating rate debt to approximately $6 billion or less than 15% of our total outstanding debt as of the end of the second quarter. Next, the momentum experienced across our global business in Q1 continued into the second quarter with outperformance across new business, escalations and churn, resulting in another quarter of over 6% organic tenant billings growth allowing us to raise our full year expectations across our Latin America, Europe and Africa segments.
We also had another strong quarter at CoreSite, where elevated leasing volumes since our acquisition continued into Q2 and were further supported by solid pricing trends, high renewal rates and interconnection growth of approximately 10% which together with our tower business drove property revenue growth of over 4% in the quarter. Complementing top line growth, and as I highlighted last quarter, we are maintaining a strong focus on cost management. Once again, in Q2, despite an elevated inflationary environment, we kept cash, SG&A roughly flat year-over-year, helping to support an adjusted EBITDA margin expansion of approximately 60 basis points to 63.1% or over 100 basis points when normalizing for VIL reserves. Finally, we continue to engage in active discussions with a focused group of investors around the potential sale of a majority equity interest in our India business as we assess strategic options in the market and exercise we anticipate completing in the second half of the year. As always, we will remain disciplined and patient with the goal of achieving the best outcome for American Tower and its shareholders.
With that, please turn to slide six, and I'll review our property revenue and organic tenant billings growth for the quarter. As you can see, Q2 consolidated year-over-year property revenue growth was over 4%, or over 6% on an FX-neutral basis. This included U.S. and Canada property revenue growth of over 5%, international growth of nearly 3% or over 7% excluding the impacts of currency fluctuations and over 7% growth in our U.S. data center business. In the quarter, we recognized approximately $35 million in revenue reserves associated with VIL short payments as collection patterns in Q2 were relatively consistent with that of Q1. Moving to the right side of the slide, we achieved another strong quarter of organic tenant billings growth, which stood at 6.2% on a consolidated basis. In our U.S. and Canada segment, organic tenant billings growth was 5.1% and approximately 6.5% absent Sprint-related churn including another quarter of elevated colocation and amendment growth contributions of nearly $60 million. Our International segment saw outperformance across nearly all reported segments, primarily due to a combination of higher-than-anticipated colocation and amendment growth and continued churn delays, resulting in organic tenant billings growth of 7.9%, up from 7.5% in Q1.
At a segment level, Africa, Europe and APAC produced growth of 12.9%, 8.3% and 5.6%, respectively, each an acceleration off of Q1, with Africa representing a record for the region, APAC delivering its highest quarter since Q3 of 2017. In Europe, demonstrating growth of over 575 basis points above its precalc average. In Latin America, we did see a modest deceleration of 5.4% as expected. Consistent with last quarter, we continue to realize benefits associated with CPI-linked escalators across the vast majority of our international markets. While a continued delay in anticipated consolidation-driven churn in Latin America has kept reported churn favorable to our initial expectations through the first half of the year. Finally, strong leasing trends across our international business has driven an acceleration in colocation and amendment growth contributions across nearly all of our segments, resulting in an approximately 40 basis point improvement sequentially at a consolidated international level. Organic tenant billings growth was further complemented by the construction of more than 565 sites with virtually all of the step down relative to Q1 associated with India volumes. As we continue to prioritize capital deployments across our footprint to projects that demonstrate the most attractive risk-adjusted rates of return.
Turning to slide seven. Adjusted EBITDA grew nearly 5% to over $1.7 billion or approximately 6% on an FX-neutral basis for the quarter. As I mentioned, adjusted EBITDA margin expanded to 63.1% driven by elevated organic growth, combined with prudent cost controls throughout the business, which allowed for a conversion of over 85% of revenue to adjusted EBITDA growth, again, on a normalized VIL basis. Cash, SG&A as a percent of total property revenue was around 6.8%, and over 20 basis point improvement compared to prior year. Moving to the right side of the slide, attributable AFFO and attributable AFFO per share decreased by less than 1% and approximately 2%, respectively. This decline includes financing cost headwinds of approximately 7% and 9% against attributable AFFO and attributable AFFO per share growth, respectively, driven by the rise in interest rates over the past year. 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, as mentioned earlier, we had a solid second quarter, and the core performance of the business continues to remain strong supporting an increase to our expectations for property revenue, adjusted EBITDA, attributable AFFO and attributable AFFO per share.
Next, consistent with our prior outlook, we have maintained our VIL revenue reserve assumption of $75 million for the year. As I noted, we saw similar collection trends in the second quarter as compared to Q1. Bringing our year-to-date reserves associated with VIL to approximately $70 million. Subsequent to the quarter end, VIL made a full payment for July's billings and has committed to paying at least 100% of billings moving forward. In this case, we could potentially see some upside to our outlook assumption. However, we believe it is prudent to leave the full year assumption unchanged at this time. Additionally, we have assumed lower U.S. services volumes through the balance of the year, resulting in an approximately $40 million reduction in gross margin as compared to our prior outlook. While the recent pullback was more abrupt than our initial expectations, moderation in carrier spend following the recent historic levels of activity we've seen in the industry isn't unexpected and is consistent with past network generation investment cycles. Despite this reduction, we're still seeing healthy levels of activity on our sites, which we expect to continue, and our guide still assumes over $40 million in services gross margin contribution in the back half of the year which on an annualized basis, is still in excess of any year throughout the 4G cycle.
It is also important to note that although our services business is non-run rate, more susceptible to in-period carrier activity and cyclical in nature, our comprehensive MLAs continue to provide us with a high degree of visibility and contractual protection against activity variability in our 2023 property revenue and organic tenant billings guide, as well as the growth we've assumed in our long-term U.S. and Canada organic tenant billings growth target. Finally, on the macro side, we have revised our FX and interest assumptions. Starting with FX. Our revised outlook includes the negative impact associated with the recent devaluation in the Nigerian Naira with impacts partially mitigated through the USD denomination of roughly half of our tenant revenues in the market. This is further offset by the strengthening of other currencies in our portfolio, resulting in minimal FX impacts versus our prior outlook. On the interest side, our guidance reflects a modest increase to interest expense based on the updated forward curve estimates of SOFR, partially offset by interest income. With that, let's dive into the numbers.
Turning to slide eight. We are increasing our expectations for property revenue by approximately $125 million as compared to our prior outlook. Outperformance was driven by approximately $65 million in core property revenue supported by increases to the U.S. and Canada segment, which includes the benefits of several nonrecurring onetime items along with our U.S. data center and international segments. Complementing our core upside, we're also increasing our outlook by another $60 million, primarily associated with straight line and pass-through revenue. Moving to slide nine. We are increasing our expectations for organic tenant billings growth at a consolidated and international level. In the U.S. and Canada, we are maintaining our guidance of approximately 5% or over 6% excluding Sprint churn, with an expectation for at least $220 million in colocation and amendment growth contributions. In Latin America, we have increased our outlook from greater than 2% to approximately 4%, largely driven by continued delays in anticipated consolidation-related churn.
In Europe, we are raising our guidance to approximately 8%, up from 7% to 8% previously, supported by modest improvements in our escalator contributions, together with an expectation for colocation and amendment growth to be closer to the upper end of our initial 2% to 3% assumption as we continue to make operational progress in Germany on leasing up our rooftop assets. Next, we're increasing our Africa outlook from approximately 9% to greater than 11%, primarily due to a continuation of solid new business demand. Although we are pleased with the acceleration in organic tenant billings growth in APAC in Q2, we are maintaining our prior outlook of approximately 4% at this time. Moving on to slide 10. We are raising our adjusted EBITDA outlook by $75 million. This reflects the strong conversion of the incremental property revenue I just mentioned, facilitated through prudent cost controls resulting in an incremental $75 million in cash property gross margin, along with an additional $40 million, primarily due to straight line. This growth was partially offset by a reduction of $40 million associated with our U.S. services business.
Turning to slide 11. We are raising our expectations for AFFO attributable to common stockholders by $25 million at the midpoint, representing approximately $0.05 on a per share basis moving the midpoint to $9.70 per share. Updates to our expectations include the cash adjusted EBITDA increase of $35 million, partially offset by approximately $10 million in other items, including the impacts of interest expense and also a slightly higher minority interest, which is the product of outperformance in our U.S. data center business. Moving on to slide 12. While our capital allocation plans remain consistent relative to our prior outlook, primarily consisting of $3 billion in common stock dividends, subject to Board approval and $1.7 billion in capital expenditures, I'd like to spend a moment to review our approach to ensure adequate capacity for our core site business as we support an elevated backlog and expectations for continued future demand. On the left side of the slide, you see our plans continue to assume approximately $360 million in discretionary spend allocated to our U.S. data center business in 2023.
This level of spend supports a high watermark of cash backlog, driven by the record levels of leasing since closing our acquisition at the end of 2021. Similarly, our retail and scale backlog, excluding hyperscale, is also at record levels, demonstrating the strength of the core business and diversification of new leasing which we expect to drive incremental ecosystem value and a continuation of the industry-leading returns CoreSite has produced historically. The differentiated nature of the CoreSite assets, representing a network cloud and digital platform rich interconnection hub, which in conjunction with large-scale, purpose-built adjacent capacity uniquely positions CoreSite to support the high-performance workloads of today and in the future. Including expected incremental AI capacity. Combined with the favorable supply and demand dynamics we're seeing across the data center industry, we have a high degree of confidence in our ability to drive double-digit stabilized yields on our development investments, largely supported by the reinvestment of CoreSite's own cash flows with further support from American Tower and our partner, Stonepeak.
In fact, our pre-leasing at the end of the quarter was approximately 36%, which further derisks our capital investments and illustrates the robust demand we're seeing across the space. While such demand drives the need for incremental investment, we are eager to support the business and realize the attractive rates of return CoreSite has historically proven, while remaining selective and disciplined in current and future development priorities and decisions. Moving to the right side of the slide, and as I mentioned earlier, we continue to execute on our financing initiatives in the quarter raising $2.7 billion in fixed rate debt, extending our average maturity to over six years while reducing our floating rate debt balance to below 15%. We also closed the quarter with net leverage of approximately 5.3 times ahead of our own deleveraging path towards our targeted range of three to five times. Moving forward, we'll remain opportunistic in potentially further accessing the debt capital markets to appropriately manage our investment-grade balance sheet.
Turning to slide 13 and in summary. Our business continues to demonstrate resiliency and benefit from ongoing demand across our operations while effectively mitigating certain risks and variability through the strength of our customer agreements. Supported by a continuation and positive growth trends in Q2, we were able to increase the full year outlook midpoints across the majority of our key metrics, largely supported by core property outperformance across our tower and data center segments. We believe our global portfolio, strong balance sheet, best-in-class operating capabilities, disciplined approach to capital allocation and keen focus to drive long-term efficiencies across our organization, has American Tower well positioned to deliver strong, sustained growth in shareholder returns as we close 2023 and over the long term.
With that, operator, we can open up the line for questions.