Ladies and gentlemen, thank you for standing by. For the GTS Holdings Limited Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded.
I will now turn the call over to your host, Ms. Laura Chan, Head of Investor Relations for the company. Please go ahead Laura.
Thank you, operator. Hello, everyone. Welcome to 2Q 2019 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 will refer to during this conference call can be viewed and downloaded from our IR website at investors.
Gdservices.com. Leading today's call is Mr. William Huang, GDS's Founder, Chairman and CEO, who provide an overview of our business strategy and performance. Mr. Dan Newman, GS CFO, will then review the financial and operating results.
Before we continue, please note that today's discussion 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 perspective as filed with the US 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.
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 90,000,000 of annual recurring revenue when fully delivered. Maintaining data center supply in Tier 1 markets continued 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 continued 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 drove us 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 And Wealth Farm to develop and operate a build to suit data center. Initially, focusing on our program for 1 of our top customers, This is a milestone achievement both from a business and from a financing perspective. During the second quarter, we 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 get 1 deal over 5 megawatts from a brand new large enterprise customer.
A market leader in China providing smartphone solutions. We are in a period when there are all kinds of macro facts 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, ice in China is growing at 86% year on year.
And is forecast to grow at 45 percent CAGR over the next 5 years. China has now become the 2nd largest cloud market globally. 90% of the China cloud market is local CSPs. 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 a solid sales pipeline from an increasingly diversified customer base. Which gives us good visibility for the coming quarters. We remain confident of achieve our target of around 80,000 square meters 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 One 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 We have made significant progress on both counts, particularly in Beijing, which is the largest market in China. During the second quarter, we initially initiated 1 new project in the Metro area of Beijing and 2 new projects in Long Farm at the edge of Beijing. Our long term land purchase, which we disclosed last quarter, has attracted great customer interest We recently commenced construction of the first building on this greenfield site. And we are expecting to obtain pre commitments very soon.
The long found land will cost us around the US13 million dollars in total, which is a relatively small up fringe out only. It comes with over 240 megawatts of the total power supply. Which will enable us to create a agreement for the acquisition of a data center, which we call the Beijing 9 located in Yidron, a primary data center hub, very close to our Beijing 1, 2, 3 cluster. Beijing 9 has an IT area of around 8000 square meters and is fully committed and stabilized. The enterprise value is at RMB693 1,000,000.
We target closing by the end of this year. With growing demand from customers, we believe that Metro DataSense like Beijing 9 will become more valuable. We believe that the resource we are building up in Beijing Metro and edge of time will position us to future increase our market share 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 requirement requirements of the most demanding customers from also data center capacity in Tier One Market where there is a high barrier to an entry and the supply is scarce.
However, we recognize that our large internet and cloud service provider customers also require substantial capacity at the locations outside of Tier One markets. To host their less latency sensitive data and applications. In the past, customers typically divested such capacity in house, but are now actively seeking seeking ways to exhaust these parts of their requirement as well. Our first foray is the 3 build to suit data centers in Herbie. We get 41 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 market. The partnership with GIC is a solution we found. It is indeed a freeway 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 will 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 in margin improvement than is apparent in the reported numbers. In 2Q 2019, our service revenue grew by 10.6%. Underlying adjusted EBIT NOI grew by 14.1% and underlying adjusted EBITDA grew by 15.2 percent 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 Our revenue is well up with our expectations, having reached 46.9% at the midpoint of our original guidance. Service revenue growth is driven mainly by customers moving into the space, which they previously committed. Moving during the first half, totaled 18,781 Square Meters. We're expecting moving during the second half to be slightly higher than in the first half. On top of which we will 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 maybe 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 twenty nineteen. And as shown on Slide 17, we will bring a further 40,000 square meters into service in second half twenty nineteen, not including the Guangzhou 6 and Beijing 9 acquisitions. We are continuously realizing operating leverage on SG And A, hence at the EBITDA level we could see some further margin improvement In the first half of the year, our CapEx is around RMB1.4 billion versus our full year guidance of RMB4.5 billion to RMB5 1,000,000,000. Our CapEx will pick up in the second half twenty nineteen with ongoing construction and payments due for acquisitions.
We still expect full year 2019 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 are 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. DDS business is almost entirely RMB denominated, across revenue, OpEx and CapEx, with the small exception of our Hong Kong operations.
In the income statement, We booked small translation gains and losses each quarter as a result of moving U. S. Dollars onshore and when permitted converting it into RMB. With regard to the balance sheet, 80 percent of our debt is denominated in RMB. Out of the 20 percent, which is not RMB, most of it relates the convertible bond, which we issued in May 2018, and which we hope will one day become equity.
We only have USD 118,000,000 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 1 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 are certainly open to doing a lot more. The fact that this program is concentrated Under the agreement with GIC, when these projects complete, we will offer them 1 by 1 for GIC to acquire a 90% equity interest. The acquisition price is designed for us to recover our development costs, including the financing element.
We will retain our 10 percent equity interest and provide management and operating services. Over the life of the project, we will earn a return from our equity investment plus recurring service fees. It may not be all that meaningful, to talk about return on equity when our equity participation is relatively small. But on this metric, these projects should look very good. In terms of and we will account for the equity interest as an associate as we have one board seat out of 3.
Initially, we will bear the CapEx for each project which could be in the Difficult project size is around 5000 to 7000 square meters per data center. We already have one project under construction, which we expect to complete and sell a 90% equity interest to GIC, the full year end. Leave 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 from our anchor customer. And last but not least, from our team led by our CEO, O'O, Jamie Ku.
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, Now 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 are 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. In terms of revenue relative to our guidance. And therefore, we are 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 are 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 are 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.
We have the first question from the line of Jonathan Atkin from RBC. Please ask your question. Ask your question.
Thanks. So I have two questions, one kind of on the topic of M and A and I wondered, Beijing 9, which you announced, what does the pipeline look like over the next several quarters for a tuck in acquisitions? And would they be on roughly this sort of same scale, 8000 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've already agreed upon in Jiangsu province Thanks.
Hi, John. It's Dan here. Firstly, on M and A, in the past, and our business plan for this year was to do one to do M and A transactions. And, we've now announced 2. By the way, Guangzhou 6 has not yet closed.
Hopefully, we'll close in the next few weeks. And Beijing IX will close very late in the year. We have an M and A team we identify a number of targets we've done diligence on quite a few data centers We're very selective and we're financially disciplined. We find relatively smooth, 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. 1206 and Beijing 9 are being acquired from the same seller. It's a 2nd 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 you some color in terms of the kind of opportunity, which is out there. With regard to GIC, maybe we didn't make ourselves quite clear.
We had signed an MOU with one of our largest customers. So under that MOU, we are committed to develop 7 data centers at 3 campuses. So that means 3 locations. We mentioned one location in in Jiangsu, the other two 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 of the commitment under that MOU right now. But we expect the same customer to have substantially more requirement than that. And over time, we 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 trends of seeking to to outsource. We're not close to doing anything, but the opportunity is there to expand this to other customers as well.
Does that answer your question?
Yes, it does. Thank you. 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 2019. And can you maybe provide an update on on what you've seen in terms of, customer behavior as they would do contracts. Maybe they depart for various reasons.
Are you any sort of customer churn beyond the traditional run rate that you have seen? And are the contract links that you're signing with enterprises and with hyperscalers relatively the same as what we've seen or have there been any changes?
Yes, John, we really mentioned churn because fortunately for us, it's statistically insignificant. In the last quarter, it was no point. 2%. Occasionally, just every few quarters, there may be a churn event, which results from some change in our customer's own organizational or operations, but we there isn't sufficient churn to be able to characterize it in any way. With regard to contract lengths, Most of the hyperscale deals now are in the 6 to 10 year band.
Actually, most are in the 8 to 10 year band. And just take this opportunity to make a comment When these contracts are signed, it's almost invariably pre commitment, these days quite often pre commitment 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's a serious failure in performance. The other contracts where they do have an early termination write 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's a very severe penalties, tens of percent of the total contract value. So our backlog really is very solid, in terms of underpinning our our growth.
Thanks. 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 notably different than 3 months ago.
Yes. So far, we didn't see any change, right? Especially our custom phase. And what we can tell is AI is overwhelming to deploy in a different vertical right now. So I think that's why our customer, their demands, the power capacity, each order, I mean, the size is much bigger before.
Yes, so I think the currency is still the 3 key driver in that in our view, it's Carl, it's still the number one driver. And the second is the internet company. And enterprise, especially the financial institutions still maintain very strong demand right now. And the demand profile is a single OLED is much bigger than before.
We have the next question from the line of Yang Liu
Thanks for the opportunity to ask questions. The first one, I think Dan just mentioned that the debt financing environment is quite favorable for GDS. Now could you please give us some numbers in terms of the current that interest rate or refinance interest rate compared with the previous terms from the banks? The second question is, when GIC acquired the 90% stakes of the built to field data centers, what is the premium in terms of the valuation compared with cost of GDS.
Hi, Yang. It's Dan again. First of all, on, in the current cost of debt, we've done some refinancing of data centers recently with Chinese banks and in fact, new relationships and we've also done a financial lease. All in costs came to less than 6%, which is 3 quarters, almost 1% point lower than it was a few quarters ago. But I stress that is for refinancing of the data centers where we would expect to get a slightly lower price.
We also got longer tenors. We've got 8 and 10 year tenants, which is quite exceptional for project term loans, with back ended amortization. So really just about as good as it gets, I think. Yeah, you asked about the premium that we pay for acquisitions. In a way, Yang, you can figure it out, right?
Because it costs us about $5 to get $1 of EBITDA. When we do these acquisitions, it costs about $8 to get $1 EBITDA. So you'll see the premium is around 50%. But in some ways, it's a kind of academic because we've done the acquisitions because there hasn't been an opportunity for us to do the project organically. Sorry, sorry, I'm probably pointing out.
Sorry. Can you repeat the question? Someone's talking to me when you're asking the question. Sorry.
Yangi, can you repeat that second question?
I would request the
operator, can we just finish answering
Excuse me. So if I understand correctly, the question was what is the premium when we sell equity interest in a project, a build suit project to GIC. Yes, the premium is 8%. But if we've incurred financing during the construction phase, That will enable us to recover our financing costs.
Mr. Yang Yu, your line is open, sir.
I have finished my questions. Thank you.
We have the next question from the line of Frank Lofan from Raymond James. Please ask your question.
Great. Thank you. Does the current guide that you've given out, does that include anything for the build to suit projects with GIT, either on the revenue or the CapEx side? And then secondly, you generally get a rolling look at your customer's business over a several year period updates throughout the year. Any change in how they're looking at their business over the next few years going forward based on the current U.
S. Trade situation?
Yes. Hi, Frank. 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 it's only a few 100,000,000. In terms of income statement, Once we transfer the 90 percent equity interest, the data center has come into service During the first year, the customer is moving in and has some flexibility about how fast they move in So we won'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 that time lag for when we complete the project. Just going back to my previous answer about the CapEx, of course, when we transfer the 90 percent equity interests to GIC, the CapEx that we've incurred will then be reversed or 90% of it will be reversed.
The the second question is that customer lowering demand, right? So I think typically the big customer will assure the 3 years demand for to us. So, especially the large cloud and the internet company, So we are pretty focused on that to keep that. Talk to them and rather than me, yes.
And wait for your name to be announced. We have the next question from the line of Robert Gutman from Guntherham Securities. Please ask your question.
Thanks for taking the question. So, just curious on the MSR, which is looking better than you'd originally anticipated. I think guidance for the year was for decline of 5% year over year. What's underlying the effect that is coming in a little better? Better.
Robert, when we talked about 5%, I was talking about 4Q 'eighteen to 4Q 'nineteen. So I talked about 5%, hopefully it's going to be a little bit less. And I'm hopeful it will be a little bit less. When we look at the pair it with the average MSR for the whole of 2018, we're still looking at something close to about a 5% year on year decline if you calculate it that way.
Okay. Thanks. 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, is tracking the top half of guidance at least. And that was that's what we that's what we forecast. What what is surprising was, which even surprised us was the profit, the EBITDA or 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 increased the headcount by 20 to 25% because our business has gone from a 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 account 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.
Great. Thank you very much.
Line. Thank you. We have the next question from the line of Gokul Harialan. JP Morgan, please ask your question.
Yeah, hi. Thanks for taking my question. My first question, Dan, can you talk
a little bit
about how much further offering leverage that is likely to happen over the next year or so given you seen a pretty strong operating leverage improvement over the last 4 to 5 quarters. 2nd question I have is, maybe for Dan and William, We're talking about 80,000 square meter pipeline capability in terms of every year potential new pipeline coming in. And the ability to prospect that and, fill it out. Now with this GIC partnership also, would that, number start to go up and be largely dedicated to Tier 1 and satellite sites or would some of the purposeful side be also included in this, in this 80 thousand square meter, ability to furnish each year?
Yes, I'm Gokul. We took our operating leverage. We always look at it at 2 levels, firstly, the data center level, where we look at the margin the data centers has stabilized. And I typically, I 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 has shifted to a 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 in the next couple of quarters, I expect the NOI margin to stay around the current level. Go into next year, we could be looking at, at least another 1 to 2 percentage point. Improvement.
I think we took out operating leverage at the SG and A level. I mean, my ambition is to get SG and A down to 5% of because that's lower than any data center operator has ever disclosed at any rate. That would indicate that we've got 3% to 4% still to go. But that will take some time, but I think we continue to make steady progress in that in that direction. And then give the wrong answer again.
The 80,000 square meters refers to what we do in our in Tier One markets. I'm not we're not including the first project all 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 7000 square meters to our area committed because that's what we have. In project number 1 in Jiangsu. So that's not been in any numbers that we've talked about before.
It's entirely additive.
Understood. So just wanted to ask, is there any discussion or any interest in some kind of partnership like this for some of your satellite, 2 Tier 1 kind of city projects as well? Or is it something that some economic faces GDS fees 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 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 and a large customer. As William said, it's really a three way partnership that customer had to provide had to accommodate, as well. And having done it now, but adapted 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 a similar structure potentially with different ownership level and we could be deploy it with us having majority, consolidating, or we could do it without having a larger stake.
But conceptually it's the same. It's a 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 a relatively shortlist 15, 20 very large customers, is important to be able
to access the lowest cost equity capital.
And that's not always the public equity market. So having established channel, but of course, establishing a partnership with a brilliant partner in 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 market or whether it's best to use the equity of a partner like GIC. So I don't rule that out at all in future. 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 or a little bit to your view on the demand. A lot of your customers on the pet appeal side have had a tough situation in their current businesses. The future businesses were actually growing. So how has any of that ramp played into any of the capacity planning discussions pipelines and discussions that you have had with them.
And also from GDS own perspective, how do you handicap any of those kind of firms into future planning?
Yes, let me just summarize for William. So Google was asking, because of the supposedly, we've got global things for the hyperscale customers in China may be having some challenges in their own cloud businesses, that may or may not be correct. But, does that 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 tower, what we commit to the market is 80,000 square meters, right? We can repeat that. That's what we have been seeing, right? I think this will not change. And because we have very, very strong customer base and the customer base came from the different verticals.
And even in the cloud side, we have the all kinds of the crop in China. So I think our custom base, whatever from the vertical a point of view or industry point of view, we are quite diversified. That's how we manage our demand and certainty. And so So that's I have to say, we will not change our CapEx plan. In other words, we are confident to deliver another $80,000 every year.
We have the next question from the line of Colin McCollum from Credit Suisse.
Fully you guys can hear me okay. Actually, I've got a difficult question for you. That's kind of a fundamental question. I'm just wondering, on this GIC transaction, Why would you choose to do it this way? I'd 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 Is it that you view this, these areas or the risk 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 it an issue just with finance raising or return of that you would expect from these data centers because you kind of suggested that the returns are okay in any way that the customer's reliable before the risk wouldn't be so big. And you've said earlier on that the financing side is very favorable at the moment. So just intrigued why you've decided to do this, particularly with really such a small equity state for the shareholders of the current shareholders of the business?
First of all, let's be clear that 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, and 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 a build to suit data center at a customer's site.
Secondly, if 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. The 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 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. 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
a greater mote. The 3rd point is about, yes, undeniably, it's about the financial returns. We started off doing 3 projects for a customer in Hervey, Of course, in this kind of situation, the customer wants to outsource, but the pricing is lower. The returns returns are lower. In the case of Her Bay, we made it work from a financial perspective by doing it entirely with debt.
Senior debt and mezzanine debt. And the project worked out very well, and we got a very good spread over our cost of capital, but it was very time consuming to do that financing. And we have to be sensitive about all that leverage, which gets consolidate 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.
Involvement, but we wanted to maximize the fee income and look at it really as a kind of managed project But for the sake of a partnership and sake of the customer, it's important to have some, equity involvement And, you know, 10% was a number that we and our partner and our customer were comfortable with. There's no ticker 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 whom 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 cost conference call. You may now disconnect your lines.