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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by for the GDS Holdings Limited Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded.
I will now turn the call over to your host, Ms. Laura Chen, Head of Investor Relations for the company. Please go ahead, Laura.
Thank you, operator. Hello, everyone. Welcome to 2Q '19 Earnings Conference Call of GDS Holdings Limited. The company's results were issued via newswire services earlier today and are posted online. A summary presentation, which we'll refer to during this conference call, can be viewed and downloaded from our IR website at investors.gds-services.com. Leading today's call is Mr. William Huang, GDS Founder, Chairman and CEO, who will provide an overview of our business strategy and performance; Mr. Dan Newman, GDS CFO, will then review the financial and operating results.
Before we continue, please note that today's discussions will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus as filed with the U.S. SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that GDS earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. GDS press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to GDS Founder, Chairman and CEO, William Huang. Please go ahead, William.
Thank you, Laura. Hello, everyone. This is William. Thank you for joining us on today's call. I'm pleased to report another good quarter with strong results across all aspects of our business. In the second quarter, we signed up customers for almost 21,000 square meters of net additional area committed or around 52 megawatts of IT power, which should generate over USD 90 million of annual recurring revenue when fully delivered. Maintaining data center supply in Tier 1 markets continue to be a critical success fact. We made a significant progress in securing key resource, both organically and inorganically, enabling us to maintain our resource advantage.
During this quarter, we initiated 3 new projects. And today, we are announcing another new acquisition. We continue to deliver operationally resulting in over 50% service revenue growth and over 80% adjusted EBITDA growth year-on-year. Our utilization rate moved up to 70%, which grew by our NOI margin to 53% and adjusted EBITDA margin to 43.5%, putting us well ahead of the guidance track. Last but not least, we are particularly excited about our new strategic partnership with GIC, Singapore sovereign wealth fund, to develop and operate build-to-suit data center, initially focusing our program for one of our top customers. This is a milestone achievement both from a business and from a financing perspective.
During the second quarter, our new business is up with the run rate for the past 6 quarters. We did 2 big deals of over 20 megawatts, each with 2 existing hyperscale customers. We also did 1 deal over 5 megawatt from a brand-new large enterprise customer, a market leader in China providing smartphone solutions. We are in the period where there are all kinds of macro effects, which may affect the market. We do not know how long it is going to last and where it will go. However, the digital economy in China is still strong. According to the IDC research, IaaS in China is growing at 86% year-on-year and there is a forecast to grow at 45% CAGR over the next 5 years. China has now become the second largest cloud market globally. 90% of the China cloud market is local CFPs. Each of our cloud customers is competing with each other intensely for a bigger piece of the market. Everyone understands that this is the ground they have to win in order to win the future. From the bottom-up perspective, we have solid sales pipeline from an increasingly diversified customer base, which gives us good visibility for the coming quarters. We remain confident of achieving our target of around 80,000 square meter net additional area committed for this year, and the pipeline is building nicely for next year. As you are aware, it has become more and more difficult to get approval for new projects in Tier 1 markets. As a result, supply is constrained. To deal with this challenge, we have evolved our resource strategy. We keep looking for new opportunities within metro areas, while also taking steps to secure highly strategic sites at the edge of the town. We have made significant progress on both counts, particularly in Beijing, which is the largest market in China.
During the second quarter, we initiated 1 new project in the metro area of Beijing and 2 new projects in Langfang, at the edge of Beijing. Our Langfang land purchase, which we disclosed last quarter, has attracted great customer interests. We recently commenced construction of the first building on this Greenfield site and we are expecting to obtain pre commitments very soon. The Langfang land will cost us around USD 30 million in total, which is a relatively small up -- front up only. It comes with over 240 megawatts of the total power supply, which will enable us to create a lot of value. We have today signed an agreement for the acquisition of data center, which we call Beijing 9, located in ETOWN, a primary data center hub very close to our Beijing 1/2/3 cluster. Beijing 9 has an IT area of around 8,000 square meters, and is fully committed and stabilized. The enterprise value is at RMB 693 million. We target closing by the end of this year. With growing demand from customers, we believe that metro data center like Beijing 9, will become more valuable.
We believe that the resource we are building up in Beijing Metro and ahead of time will position us to future increase our market share in China's largest market. We are very pleased to announce today our new tie-up with GIC, the partner of choice in the data center industry. Our business is strategically positioned to fulfill the requirements of the most demanding customers from all sorts of data center capacity in Tier 1 markets, where there is a high barrier to entry and the supply is scarce. However, we recognize that our large Internet and cloud service provider customers also require substantial capacities at locations outside of Tier 1 markets to a host that there are less latency-sensitive data and applications. In the past, customers typically developed such capacity in-house, but are now actively seeking ways took also this part of their requirements as well. Our first foray is the 3 build-to-suit data centers in Hebei, we've did one of our top customers last year. We gained experience from these projects and the outcome is highly successful. Since then, we have been proactively seeking an approach, which will enable us to do more for our customers outside of Tier 1 markets, while leveraging our professional skills, generating additional earnings and continuing to prioritize capital allocation to Tier 1 markets. The partnership with GIC is the solution we found. It is indeed a 3-way partnership with strong endorsement by our customer. It makes us even more unique in that we are able to serve our customers wherever and whenever. With that, I'll hand over to Dan for the financial and operating review. Thank you.
Thank you, William. Starting on Slide 12. When we strip out the contribution from equipment sales and the effect of FX changes, we see even stronger growth and margin improvement than is apparent in the reported numbers. In 2Q '19, our service revenue grew by 10.6%, underlying adjusted EBIT -- NOI grew by 14.1% and underlying adjusted EBITDA grew by 15.2% in consecutive quarters. Our underlying adjusted NOI margin reached 53%, and our underlying adjusted EBITDA margin hit 44.3%, which is 9 percentage points higher than a year ago. Turning to Slide 13. With 2 quarters completed, our revenue is well up with our expectations, having reached 46.9% of the midpoint of our original guidance. Service revenue growth is driven mainly by customers moving into the space, which they previously committed. Move-in during the first half totaled 18,781 square meters. We're expecting move-in during the second half to be slightly higher than in the first half, on top of which we will have additional revenue-generating capacity from Beijing 9, when the acquisition closes.
Our MSR has been pretty much flat over the past few quarters. However, we are expecting a 1 or 2 percentage point drop over the next couple of quarters. The decline over the course of 2019 may be slightly less than we were previously expecting. Slide 14 shows the quarterly trend in margin improvement at the underlying adjusted NOI and EBITDA levels. Most of the recent margin improvement has been at the data center level. Last year, we scaled up our operations materially. Now we're seeing the operating leverage on the enlarged base. In the next couple of quarters, we're expecting the NOI margin to stay at around the current level because we have a lot of new capacity coming into service, which will lead to a step-up in fixed costs. For reference, we brought an additional 20,000 square meters into service in first half '19. And as shown on Slide 17, we will bring a further 40,000 square meters into service in second half '19, not including the Guangzhou 6 and Beijing 9 acquisitions. We're continuously realizing operating leverage on SG&A. Hence, the EBITDA level, we could see some further margin improvement in the second half. Turning to Slide 17. In the first half of the year, our CapEx is around RMB 1.4 billion versus our full year guidance of RMB 4.5 billion to RMB 5 billion. Our CapEx will pick up in the second half '19 with ongoing construction and payments due for acquisitions. We still expect full year '19 CapEx to be within our guidance range. On Slide 18. Currently, the debt capital market environment in China is exceptionally favorable for us, and we're taking advantage of this to get longer and cheaper facilities. We're also refinancing out some foreign bank loans, so that we can keep that capacity in reserve to use for situations which may take longer with local banks, such as acquisition financing. Our policy has always been to minimize FX exposures. GDS business is almost entirely RMB denominated across revenue, OpEx and CapEx, with the small exception of our Hong Kong operations. In income statement, we book small translation gains and losses each quarter as a result of moving U.S. dollars on shore and when permitted converting it into RMB. With regard to the balance sheet, 80% of our debt is denominated in RMB. Out of the 20%, which is not RMB, most of it relates to the convertible bond, which we issued in May 2018, and which we hope will one day become equity. We only have USD 118 million in term loans, denominated in U.S. dollars, and our strategy is to keep foreign currency borrowing to a minimum. Turning to Slide 19. I'd like to add to what William said about our GIC partnership. To begin with, we have signed a binding MOU with one of our largest customers for 7 build-to-suit data centers at 3 campuses to be developed over the next couple of years. The number of projects can change. It is up to the customer. We're certainly open to doing a lot more. The fact that this program is concentrated on a few sites makes it very practical for us. Under the agreement with GIC, when these projects complete, we will offer them one by one for GIC to acquire a 90% equity interest. The acquisition price is designed for us to recover our development cost, including the financing element.
We will retain our 10% equity interest and provide management and operating services. Over the life of the project, we'll earn a return from our equity investment plus recurring service fees. It may not be all that meaningful to talk about return on equity, where now equity participation is relatively small. But only on this metric, these projects should look very good. In terms of accounting, the service fees will come in at the top line, and we'll account for the equity interest as an associate as we have 1 build-to-suit out of 3. Initially, we will bear the CapEx for each project, which could be in the order of few hundred million RMB, which will then be reversed when we sell the 90% equity interest.
Typical project size is around 5,000 to 7,000 square meters per data center. We already have 1 project under construction, which we expect to complete and so the 90% of equity interest to GIC before year-end. Believe me, it is very complicated and challenging to establish a partnership like this in China. It has taken 18 months and required great commitment from GIC for our anchor customer and last but not least, from our team led by our COO, Jamie Khoo. I'm really proud of this achievement and grateful to our partners. It is a great solution to financing build-to-suit data centers in remote areas. But more than that, we believe that the ability to access this kind of capital will be of great strategic value to us as we develop our franchise.
Getting back to Slide 20. Our backlog consists of binding commitments from customers. It has increased again to over 93,000 square meters, representing 74% of our current utilized capacity. It provides high visibility to our future growth. Our backlog is almost entirely made up of large orders from hyperscale customers. They're all very high-quality counterparties and household names. 55% of the backlog relates to data centers, which are currently under construction, 55% is the highest proportion it has ever been. Over the past 12 quarters, it was typically 30% to 40%. The reason why the proportion has increased is because our customers are pre-committing earlier and because we have a larger number of Greenfield projects, which take longer to build. To finish on Slide 22, for FY '19, we're well on track in terms of revenue relative to our guidance. And therefore, we're raising the bottom end of the guidance range to the midpoint of the guidance range, while leaving the top end unchanged. Our EBITDA growth has been so strong that we're raising the bottom end of the guidance range by 7.3%, so that it is above the top end of the original guidance range, and we're raising the top end by 5.9%. With regard to CapEx, we'll keep the original range unchanged.
With that, I will end the formal part of my presentation. We'd now like to open the call to questions. Operator?
[Operator Instructions] We have the first question from the line of Jonathan Atkin from RBC.
I have 2 questions. One, kind of on the topic of M&A. And I wonder, Beijing 9, which you announced what does the pipeline look like over the next several quarters for additional tuck-in acquisitions? And will they be on roughly this sort of same scale 8,000 square meters? Or would it be markedly larger going forward? And then on the GIC arrangement, I wondered how soon you would anticipate commencing any additional projects under the JV in addition to what you already agreed upon in Guangzhou province?
It's Dan here. Firstly, on M&A. In the past, our business plan for this year was to do 1 to 2 M&A transactions. And we've now announced 2. By the way, Guangzhou 6 is not yet closed, hopefully we'll close in the next few weeks. Beijing 9 will close very late in the year. We have an M&A team. We identify a number of targets. We've done diligence on quite a few data centers. We're very selective. And with financially disciplined, we find relatively few that we want to move forward with. I think we can sustain 1 to 2 deals like the Beijing 9 deal that order of magnitude per annum. However, I would highlight that from time-to-time, larger opportunities come along. Guangzhou 6 and Beijing 9 being acquired from the same seller, so second-tier data center operator, which had a portfolio with more than 10 data centers. We diligence them all and we found 2 out of 10 that we wanted to move forward with. Right now, there are 1 or 2 situations in the market for small portfolios of data centers or single data center campuses, but there's no certainty about whether we'll proceed with those. But just to give some color in terms of the kind of opportunity, which is out there. With regard to GIC, maybe I didn't make ourselves quite clear. We had signed an MOU with one of our largest customers. So under that MOU, we're committed to develop 7 data centers at 3 campuses, so that means 3 locations. We mentioned 1 location in Guangzhou, the other 2 locations are in other parts of China. And those 7 data centers instantly aggregate over 130 megawatts of IT power. So that's the extent or the commitment under that MOU right now. But we expect the same customer to have substantially more requirement than that. And over time, expect the scale of what we undertake through this partnership to increase. We're also in early stage, but in discussions with 3 or 4 other customers, who have their own equivalent campuses in remote areas and who are all following the trend of seeking to outsource. We're not close to doing anything, but the opportunity is there to expand as to other customers as well. Does that answer your question?
Yes, it does. And then just kind of a commercial question. I think you entered this year with maybe 6% or 7% of your area committed coming up for renewal in calendar '19. And can you maybe provide an update on what you've seen in terms of customer behavior as they renew contracts? Maybe they depart for various reasons. Are you seeing any sort of customer churn beyond the traditional run rate that you have seen? And are the contract lengths that you're signing with enterprises and with hyperscalers relatively the same as what we've seen? Or have there been any changes?
Jon, we already mentioned churn, because fortunately for us it's statistically insignificant, and in the last quarter it was 0.2%. Occasionally, just -- every few quarters, there may be a churn event, which results from some change in our customers' own organization or operations. But there were insufficient churn to be able to characterize it in any way. With regard to contract length, most of the hyperscale deals now are in the 6- to 10-year band, actually most during the 8- to 10-year band. And I just take this opportunity to make a comment. When these contracts are signed, it's almost invariably precommitment. These days, quite often, precommitment 1-year before the data center comes into service. So some of the contracts have no right of early termination for the customer to terminate early at any time over the life of the contract, except, of course, if there is a serious failure in performance. The other contracts where they do have an early termination right is typically only kicks in after the end of the move-in period. So that would be say 2 years after the beginning of the service delivery. And then there is a very severe penalties, tenths of percent of the total contract value. So our backlog really is very solid in terms of underpinning our growth.
And maybe a question for William on -- in terms of just demand trends that you're seeing, whether it's gaming or AI, cloud, social networking or enterprise. But any particular industry verticals or types of companies where you're seeing demand trends notability different than 3 months ago?
Yes. So far we didn't see any change right now, especially our customer base. Again, what we can tell is, AI is overwhelming to deploy in the different vertical right now. So I think, that's why our customer -- their demand -- the power capacity -- each order -- I mean, the size is much bigger than before. So I think the current -- the 3 key driver in our view is power has stood at #1 driver; and the second is Internet company; and enterprise, especially, the financial institution still maintain very strong demand right now. And the demand profile signal is always much bigger than before.
[Operator Instructions] we have the next question from the line of Yang Liu, Morgan Stanley.
The first one, I think, Dan, just to mention that the debt financing environment is quite favorable for GDS now. Could you please give us some numbers in term of the current debt interest rate or refinance interest rate compared with the previous terms from the banks? The second question is, when GIC acquired 90% stakes of the build-to-suit data center, what is the premium in term of the valuation compared with cost of GDS?
Yang, Dan again. First of all on current costs to debt. We've done some refinancing of data centers recently with Chinese banks and in fact new relationships, and we've also done financial lease. The all-in cost came to less than 6%, which is 3 quarters, and almost 1 percentage point lower than it was a few quarters ago. That is for refinancing of the data centers, where we would expect to get a slightly lower price. We also got longer tenants. We've got 8 and 10-year tenants, which is quite exceptional to project term loans with back-ended amortization. So really just about as good as it gets, I think. Yes, you asked about the premium that we pay for acquisitions. In a way, Yang, you can figure it out, right, because it cost us about $5 to get $1 of EBITDA. When we do these acquisitions, it costs about $8 to get $1 of EBITDA. And so you can see the premium is around 50%. But in some ways, it's kind of academic because we've done the acquisitions because there hasn't been an opportunity for us to do a project organically. Sorry, and someone was pointing out to me. I'm sorry, can you repeat the question? Someone was talking to me, when you were asking the question.
Yang, can you repeat the second question?
[Operator Instructions]
Operator, can we just finish answering Yang's question.
Sorry, sorry, sorry. And Yang, excuse me. So if I understand correctly, the question was, what is the premium when we sell equity interest in a project -- build-to-suit project to GIC? The premium is 8%. But if we've incurred financing during the construction phase, that will enable us to recover our financing cost.
[Operator Instructions] We have the next question from the line of Frank Louthan from Raymond James.
There is a current guidance that you've given out, does that include anything for the build-to-suit projects with GIC, either on revenue or the CapEx side? And then, secondly, you generally get a rolling work with your customers business over a several year period, a big [indiscernible] year. Any change in how they're looking at their business over the next year's going forward based on the current U.S. trade situation?
The guidance does include the CapEx for the assets -- the build-to-suit assets that we are incubating, if you like, during the construction period, but is only a few hundred million. In terms of income statement, once we transfer 90% equity interest and the data centers come into service, during the first year, the customer is moving in and has some flexibility about how fast they move in. So we wouldn't be recognizing any significant service fees probably until 9 or 12 months after the data center comes into service. So there will always be that time lag from when we complete the project. Just going back to my previous answer about the CapEx. Of course, when we transfer the 90% equity interest to GIC, the CapEx that we've incurred will then be reversed. Well, 90% of it will be reversed.
Frank, the second question is customer lowering demand, right? So I think typically the big customer was assured the 3 years demand for -- to us, so especially with the larger cloud and the internet company. So we are pretty focused on that -- keep -- talk to them and -- regularly, yes.
[Operator Instructions] We have the next question from the line of Robert Gutman from Guggenheim Securities.
So just curious on the MSR, which is looking better than you'd originally anticipated. I think guidance for the year was a -- for a decline of 5% year-over-year. What's underlying the effect that's coming in a little better?
Robert, when we talked about 5%, I was talking about 4Q '18 to 4Q '19. So yes, I talked about 5%, hoped it was going to be a little bit less, and hopefully it will be a little bit less. When we look at the average MSR for the whole of 2019 compared with the average MSR for the whole of 2018, we're still looking at coming close to about a 5% year-on-year decline if you calculate it that way.
Okay. And then just in terms of the strong results in the quarter, in terms of revenue, would you say it was more from, sort of, just faster move-ins and sort of a pull forward? Or was it greater-than-expected sales in the quarter with immediate commencements?
Actually, Rob, the revenue was pretty much what we were expecting internally. It's tracking the top half of guidance at least. And that was -- that's what we forecast. What is surprising was, which even surprised us was the profit, the EBITDA, the NOI growth is the amount of operating leverage we've been able to realize, that did exceed. That has exceeded our own expectations. Last year, we, I think increased the headcount by 20% to 25% because our business has gone from 40,000 square meter net add business to an 80,000 square meter net add business on an annual basis. So we had to scale up to take count of that. And then since early this year, we've barely increased our operating cost base, and that's why it's come through in very sharp margin improvement.
[Operator Instructions] We have the next question from the line of Gokul Hariharan from JP Morgan.
My first question, Dan, can you talk a little bit about how much further opting leverage that is likely to happen over the next year or so, given you've seen a pretty strong operating leverage improvement over the last 4 to 5 quarters? Second question I have is, maybe for Dan and William. We'll talk about 80,000 square meter by planned capability in terms of every year potential new pipeline coming in and the ability to prospect that and build it out. Now with this GIC partnership also, would that number start to go up and be largely dedicated to Tier 1 and satellite size? Or would some of the purposeful size be also included in this 80,000 square meter ability to furnish each year?
Gokul, we took a lot of operating leverage. We always look at 2 levels. Firstly, the data center level, where we look at the margin for the data centers is stabilized. And typically, I'd say, it's 55%. Of course, it's a little bit higher than that. And then, we have the dilution effect or dampening effect from data centers, which are ramping up. And over time, as the balance has shifted to greater proportion being stabilized, that's been raising the margin. I think over the next -- you said over the next few quarters, because I think over the next couple of quarters, I expect the NOI margin to stay around the current level. And going to next year, we could be looking at least another 1 to 2 percentage point improvement. I think we took up operating leverage at the SG&A level. I mean, my ambition is to get SG&A down to 5% of revenue because that's lower than any data center operator has ever disclosed, in any way. That would indicate that we've got 3% to 4% still to go. That will take some time, but I think we'll continue to make steady progress in that direction. The second question about the 80,000 square meters. Let me make sure I understood correctly and don't give the wrong answer again. The 80,000 square meters refers to what we do in our-- in Tier 1 markets. I'm not -- we're not including the first project or the future projects that we undertake through this joint venture in that 80,000 square meter number. If we did, I would be adding another 7,000 square meters to our area committed because that's what we have in project #1 in Guangzhou. So that's not been in any numbers that we've talked about before it's entirely additive.
Understood. So I just wanted to ask, is there any discussion or any interest in some kind of partnership like this for some of your satellite to Tier 1 kind of city project as well? Or is it something that from an economic basis did you see that it's better serve to actually fulfill them on its own?
Well, our business plan and our capital raising is based on what we see in Tier 1 markets. I think we're well-capitalized for the opportunity in Tier 1 markets. But as I commented during the presentation, a lot of work went into developing the structure for this partnership with GIC and large customers. As William said, it really a 3-way partnership that customer had to provide -- had to accommodate as well. And having done it now, but adopted specifically for these build-to-suit projects in remote areas. Yes, it's certainly something that is in the back of our minds that we could deploy similar structure potentially with different ownership level, and they could be deployed with us having majority and consolidating. Or we could do it without having a larger stake, but conceptually it's the same. It's the differential return as a result of having an equity investment plus a management and operating fee. I think in this industry, given that a very large part of the demand is coming from relatively short list, 15, 20 very large customers, it's important to be able to access the lowest cost equity capital, and that's not always the public equity market. So having established a channel, that, of course establishing a partnership with a brilliant partner, GIC, I think that positions us very well to be able to look at our requirement and see whether it's best to use our own equity effectively comes from the public equity markets or whether it's best to use the equity of a partner like GIC. And so I don't rule that out at all in the future. And -- but it's not something that we're specifically contemplating in terms of any actual situation right now.
Okay. Just if I may ask a little bit more on the demand situation, I think previous caller had alluded to your view on the demand. And a lot of your customers on the hyperscale side have had a tough situation in their current businesses. Their future businesses are still growing. So how -- has any of that really played into any of the capacity planning discussions or any discussions that you've had with them? And also from GDS own perspective, how do you handicap any of those tender terms into future planning?
Yes, let me just summarize for him, so Gokul was asking. Because of the -- supposedly, Gokul thinks the hyperscale, hospitals in China may be having some challenges in their own cloud businesses, that may or may not be correct. But those all come through in terms of what we see with resource capacity planning, many changes in capacity planning and how do we adapt to that.
I think, current our -- what we commit to the market is 80,000 square meter, right. We can repeat that. That's what we having seen, right. I think this will not change. And because we have very, very strong customer base and our customer base came from the -- come from the different vertical. And even in the cloud side, we have the -- all kind of the cloud in China. So I think our customer base whatever from the vertical point of view or a industry point of view, we are quite diversified. That's how we managed our demand and certainty and our -- so I have to say, we will not change our CapEx plan. In other words, we're confident to deliver another 80,000 every year, right.
We have the next question from the line of Colin McCallum from Credit Suisse.
Hopefully, you guys can hear me okay. I actually have a bit of a statistical question for you. It's been a fundamental question. I'm just wondering all this GIC transaction, why would you choose to do it this way and only be taking a 10% stake plus service fee on the GDS side? Is it -- you alluded a couple of times to remote areas. Is it that you view this -- these areas or the risks attached to these areas or this customer, in particular, being way above what you think your public shareholders have kind of signed up for? Or is an issue just with finance raising or return that you would expect from these data centers? So could you kind of suggest that the return is okay in any way, that the customers are reliable, that's what -- the rest have been so bad and you've said earlier on that the financing side is very stable at the moment. So just intrigued why you decided to do this, particularly with really such a small equity stake for the shareholders of -- the current shareholders of the business?
Colin, good question. First of all, let's be clear. The kind of project we're talking about is totally different from our mainstream business. These are build-to-suit projects on sites where, in this case, typically the customer actually owns the real estate, owns the power infrastructure. He is outsourcing the design, the construction, the fitting out and the long-term operation of the data center. So in that respect, it's a different product entirely. It's build-to-suit data center at a customer's site. Secondly, we look at the quantum or the volume. I've always said that our value is in fulfilling customers' requirement for somewhere to locate their latency-sensitive data and applications. And customers have a huge requirement, which is not latency-sensitive as well. So the volume of what gets put into remote locations is very substantial. And our customers are asking us to follow them there, and that's not part of our business plan, it's not part of what I said earlier, it's not part of what we've planned for in terms of our capital raising, it requires a lot of additional capital. And for relationship reasons, we want to be able to do this and nobody else can do it. If we can do this as well as what we're doing in Tier 1 markets, that gives us an even more edge and -- to use a term even greater moat. And the third point is about, yes, undeniably, is about the financial returns. And we started off doing 3 projects for a customer in Hebei. Of course, in this kind of situation, the customer wants to outsource, but the pricing is lower, the returns were lower. In the case of Hebei, we made it work from a financial perspective by doing it entirely with debt -- senior debt and mezzanine debt. And the projects worked out very well, and we got a very good spread over our cost of capital. But it was right time consuming to do that financing, and we have to be sensitive about all that leverage, which gets consolidated on our balance sheet. So we started looking around to see if there was -- first of all, if there was a better way of doing these projects, specifically off balance sheet, which was replicatable where we could scale up, where we could have the capacity to do as much as the customer wants. And we spoke to a range of different investors and the proposal that we received from GIC was the best one. We have a significant operational involvement. We must have a significant operational involvement. So we wanted to maximize the fee income and look at it really as like a managed project. But for the sake of a partnership and sake of the customer, it's important to have some equity involvement, and 10% was a number that we and our partner and our customer were comfortable with. There's no particular magic about 10%, but that's where it came out.
Ladies and gentlemen, as there are no further questions, I'd like to now turn the call back to the company for closing remarks.
Thank you once again, everyone, for joining us today. If you have further questions, please feel free to contact GDS Investor Relations through the contact information on our website or the Piacente Group Investor Relations. Thank you.
This concludes this conference call. You may now disconnect your lines.