Hello, ladies and gentlemen. Thank you for standing by for GDS Holdings Limited Third Quarter 2018 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 recorded I'll now turn the call over to your host, Ms.
Laura Chen, Head of Investor Relations for the Company. Please go ahead Laura.
Thank you, Joanna. Hello, everyone, and welcome to 3q 2018 earnings conference call of GDS Holdings Limited. Lia's Day 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. Gdservices.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's 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 uncertainties is included in the company's perspective as filed with the U S SDC. The company does not assume any obligations 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, Nora. Hello, everyone. This is William. Thank you for joining us on today's call. I'm very pleased to report another quarter of outstanding performance with significant progress across our business.
Let's start, starting with, sales, which is a leading indicator of our future revenue and the positive growth. In the third quarter, we signed up customers for nearly 19,000 square meters of net additional area committed. All of this is organic. All of this is in Tier 1 markets. With this addition, We stayed on track to double the new business we signed last year.
At the same time, we delivered to our customers around 14,000 square meters of additional revenue generating space. The utilization rates moved up to 68%. This drove another quarter in which our adjusted EBITDA grew by well over 20% quarter on quarter 100% year on year. Backing this up, We started the construction of 4 new projects and brought another 4 into service. On time and within budget.
We kept sales and the capacity growth synchronized. The pre commitment rate for areas under construction was 45% based on silent cultures. With significant more in the construction, in the contracting process. And always, we ensured that all of our projects are fully financed with sufficient equity and long term project debt. Overall, this performance demonstrates the resilience of our business and our ability We are once again raising our 2018 guidance for revenue and EBITDA.
Turning to Slide 4. A highlight of our sales achievements for this quarter was 3 significant new customers wins. Namely JD, Kingsoft and NetEase. This was a direct result of our targeting of large scale cloud and internet customers who we believe are strategically important for our franchise because of their cloud platforms, valuable data and ecosystems. On the enterprise side, we won our largest ever order from a foreign financial institution, a top U.
S. Back, which is moving fast to capitalize on the financial services liberalization in China. And in this quarter, new customers accounted for over 50% of our new business. This demonstrates that we keep is diversifying our top customer base. At the same time, this does not mean our existing customers are pulling back based on based on what we see in our sales pipeline and what our top customers should shared with us.
We don't see any lag up in the current level of demand. There is a lot of the data pointing to a slowdown in parts of the digital economy as a result of macroeconomics economic and the geopolitical factors. How is this affecting us? The short answer is that we don't see it. I think that there are 3 main reasons to explain the apparent disconnect.
1st of all, our business is geared towards the growth of cloud platforms, As everyone knows, public cloud in China is still at an early stage of development The eye segment is just 15% of the U. S, but a forecast to grow at nearly double the cagr over the next 5 years. Alibaba, the market leader has just reported 19% year on year growth, revenue growth for its cloud business, which is similar to our growth rates, Furthermore, our largest customers still have a long way to go to migrate all of their own onto their cloud platform. This internal demand is not reflected to the reflected in the disclosed revenue figures. The second reason is new technology.
In particular, AI, more and more applications are become AI enabled It's a major focus area for Chinese tech leaders. They expect to create a lot of economic and economic values from AI over the next few years. From a technical perspective, AI requirements more data, more storage and more compute computation. Many AI applications are also highly latency sensitive. This is increasing demand for data centers like ours in Tier 1 markets.
The third reason is that our largest scale customers secured their supply of data center resource based on 12 to 24 months planning time horizon. The capacity to fulfill their requirements does not exist. It has to be built. Therefore, our customers need to contract with us Now in order to ensure that they will be able to execute their business plans in 2019 2020. This is why we have a large backlog and high visibility for future growth.
In summary, in summary, we remain highly confident about the sales outlook based on our existing and new customer relationships and the evolving technology. Let's turn to Slide 6. I have talked about the demand. Now let me talk about supply. There are many changes to creating new resource supply in Tier 1 market due to the pressure on real estate and power.
As scale increases, these challenges are only getting bigger. The ability to deal with these challenges is one of the factors which sets GDS apart. As we initiated new projects, we consistently restock our resource pipeline In addition to what you see currently under construction, we have another 100 square meters, 100,000 square meters plus of capacity held for future development. Our ability to maintain continuous supply supplying all Tier 1 markets is a critical consideration for hyperscale customers. No other service provider in China comps close to us in terms of data center platform.
This is why we don't see any significant change in the competitiveness in Texas. Going forward, we are evaluating kind of tight development on the edge of the Tier 1 markets to industrialize our capacity expansion. Making it easier and more efficient for us to scale up. We are also actively considering entering 1 or 2 new Tier 1 markets. We expect to make made announcements about such projects over the next couple of quarters.
We have a great track record of delivering resource to customers for the expansion. Although we don't talk about it's very often, it's very often. We also have a great track record of delivering exceptional operating performance. We were recently put to an extreme test During September, Southern China was struck by the worst platform in 100 years, As shown on slide 8, we had 80 self developed data centers in the eye of the spot. Despite over 500 failures in the power grid and the damage to other critical infrastructure in the center and Guangzhou regions.
Our data centers ran nonstop without any breach of SLAs. This is the kind of achievement which our customers really recognize and appreciate. With that, I will hand over to Dan for the financial and operating review.
Thank you, William. Starting on Slide 13, where we strip out the contribution from equipment sales and the effect of FX changes. On a quarter on quarter basis, our service revenue grew by 20.2%. Our underlying adjusted NOI grew by 26.2% and our underlying adjusted EBITDA grew by 29.4%. Our underlying adjusted EBITDA margin increased by 2.7 percentage points to 38%.
Our reported adjusted EBITDA margin was 39.5 percent, a 3.1 percentage point increase quarter over quarter and an 8 percentage point increase year over year. Turning to Slide 14, the main driver of revenue growth was the increase in area utilized with around 20,000 square meters added in the 2nd quarter and a further 14,000 square meters in the third quarter. Our contracts with large scale customers typically provide flexibility for how fast they move in. This gives us a bottom line in terms of delivery schedule and upside if customer move in accelerates. The outperformance in the Second And Third Quarters reflects faster than expected move in.
This might surprise you considering reports from the tech supply chain, but it just goes to show that our experience does not necessarily correlate with what they are seeing. Monthly service revenue or MSR per square meter in 3Q 2018 declined slightly from the previous quarter. However, if we exclude the impact of the 3 Hervey projects, which came into service around mid year, the MSR actually increased. An MSR of 2759 RMB per square meter excluding Herve, is 2.5% below the average for the preceding 12 quarters. As we grow our key objective is to sustain a return on investment as measured by unlevered post tax IRR in the mid teens.
The MSR is a rough approximation for the average selling price or ASP. But when it comes to measuring returns, we must also look at what is happening to development and operating costs. I'll come to this in a moment. As shown on Slide 15, profit margins are an upward trend. The growth drag at the adjusted NOI level, which we saw in the past few quarters, has now reversed.
For this quarter, the margin expansion mainly came from the leverage on data center level fixed costs as a result of higher utilization. As shown on Slide 16, Our data center's area and service is now over 50% stabilized compared with 47% in 2Q 2018. The increase in the stabilized proportion contributed to the margin improvement. At the corporate level, on Slide 17, SG And A is 10.9% of service revenue. Going forward, we expect to achieve significant further leverage on our corporate overheads, Factoring in full delivery of the backlog, we can already see that the current level of SG and A is down to 6% In 3Q 2018, our CapEx paid was around RMB 1,100,000,000, including RMB 111,000,000, related to acquisition consideration.
For the year to date, our cumulative CapEx paid was around RMB3 billion, Most of the cost of the Hong Kong Real Estate acquisition will appear in 4Q 2018 CapEx. As you can see from the breakdown of CapEx incurred, it will cost an estimated RMB2.6 billion or USD 380,000,000 to complete all the projects, which we have currently in service and under construction. This would get us to a total of 191,000 square meters of fully fitted and equipped capacity. For the projects under construction, the estimated CapEx per square meter is around RMB60,000 or $8800 per square meter at current exchange rates, which indicates how we have been lowering costs and maintaining our returns at target levels. Turning to Slide 19, During 3Q 'eighteen, our net debt increased from RMB 7,200,000,000 to RMB 8,800,000,000.
Part of the increase was due to the in part was due to the settlement of CapEx payables. Our net debt to last quarter annualized adjusted EBITDA ratio decreased from 7.8x to 1.3x. However, in 4Q 2018, with the payment for Hong Kong, we expect it to rise again. Our effective interest cost was 6.1%. Most of our existing loans are project finance at the data center level.
These facilities are structured in a conservative way matching the debt service to the project cash flows over a 5 year period. Typically, once the data center is stabilized, The project debt to data center EBITDA multiple is around 3 times. With a high level of pre commitment, in the form of 6 to 10 year contracts with investment grade counterparties. The ability to service this debt over the project life cycle is assured. Once projects are stabilized, our practice is to refinance on a longer term basis.
This means that we always have We completed 4 project finance transactions for a total facility amount of RMB792 million. Currently, we have another 5 project financings ongoing for a total facility amount of RMB 2,900,000,000. Out of which $808,000,000 RMB is refinancing. The China banking market is currently very liquid and very receptive to our business. The benchmark rates for determining our interest costs are stable.
In fact, they have not changed for 3 years. This gives us a high degree of confidence in our ability to continue project financing and refinancing to the extent required. Every project, which we have announced to date, is fully funded with equity and debt. This means that we are fully funded to the level of 191,000 square meters of move in ready space In addition to this, we still have capital available for allocations new projects which we will announce in the future. We are confident of our ability to leverage this capital in the same way as we have always done.
With a combination of available capital and leverage capacity, we estimate that we could build out a further 50,000 square meters on top of the existing 191,000 square meters in service and under construction. Turning to Slide 20. As at the end of the 3Q 2018, our backlog had increased again to over 61,000 square meters. We currently have around 100,000 square meters, which is revenue generating. The backlog implies that we can increase the revenue generating space by 60% without signing any new customer contracts.
Given the operating leverage, this should translate into more than 60% EBITDA growth from the level of 3Q 'eighteen based purely on what is already contracted. Finally, on Page 21, Our 3Q 2018 results clearly show that we are tracking ahead of expectations in terms of revenue and adjusted EBITDA growth. The accelerated move in has brought forward new service revenue that we expected to commence later. Given where we are today, we are further raising our guidance for FY 2018 revenue and adjusted EBITDA to not less than RMB 2,750,000,000 and RMB 1,020,000,000, respectively. The new numbers imply year on year growth of over 70% for revenue and over 99% for adjusted EBITDA.
In both cases, exceedingly year on year growth rate, we achieved in FY 2017. At the same time, we are maintaining our FY 2018 CapEx guidance of RMB 4,000,000,000, unchanged. With that, I will end the formal part of my presentation and we would now like to open the call to questions. Operator? Thank you.
You. Our first question comes from the line of John Ekin from RBC. Please ask a question.
Thank you very much. So I was interested, I guess a question for William or for Dan. As you look at potentially acquiring projects that are underway by smaller developers, what does the pipeline look for sort of small tuck in M and A. And then a couple of questions that came to mind from your slide deck. Slide 16 gives information about the stabilized asset pool.
And I wondered if you could tell us what the margins are for that set of stabilized assets. And then, and then lastly, on Slide 18, you talked about your construction program, just under half of the area is pre committed. 3 of the projects that you list there are 100% pre committed. And as we think about the non pre committed sites in Beijing, and Shanghai, are those likely to fill with one single customer or would you potentially fill that with multiple logos?
Thanks.
Hello, John. This is William. I think what we see there in the market, I mean, what happened is, and we think there's a pretty lumpy, there's a lumpy acquisition opportunity in the market. So we are we select a deal very, very cap rate. So we have a we have more top pipeline, than before, but that led us can select use a very high standard to select the target acquisition deal.
So I think, but with you in the early stage, to evaluate, there's a lot of the project right now. So you want to add some more color
Well, just on the other two questions that John asked, the margin for the stabilized part of the portfolio, the stabilized part of the area in service it fluctuates. But in the 3rd quarter, it was, it was, over 55%. And about the projects, if I understood correctly, the projects which are under construction, but not yet pre committed. So I think we provided some information about when those projects will come into service. So we just look at the two projects that will come into service in, the first half of next year, which are not yet pre permitted.
One of them Beijing 4 For now or from a section, we position that for enterprise and financial institution customers who typically don't pre lease. They may begin to take commitments 3 months before it comes into service. But I said for now, because there is some pressure from large scale customer. So we may reposition, reallocate that capacity. We'll make a decision in the near future.
The other data center, which is due to coming to service in the first half twenty nineteen, which is not yet pre committed, is phase 3 of, what we call our Shenzhen V data center. It's a very huge building, relatively centrally located in Shenzhen is highly marketable Right now, it's a toss-up as to whether it goes to an existing customer in that building or whether we, are free to offer it to other customers. Either way, that's very nice resource to have on our hands. Does that answer your question, Tom?
I would add a little bit on the M and A view Number 1, the current, currently, what we see in the pipeline is much stronger than before. But that does not say we would take action immediately. This allowed us to have a more opportunity to get a view. But our strategy is still keep on organic growth. That's our priority.
Thank you. That does answer the questions. And then just lastly, given the strong demand and the desire to grow, including potentially in a new Tier 1 markets. How do you think about your various financing options to fund this expansion?
Yes, John. There's debt and there's equity. Right now, the position in terms of the banking markets in China, as I said in the prepared remarks, is very favorable to us. And partly as a policy response to what is happening. The Chinese government has reduced reserve asset requirements, I think, four times for Chinese banks.
And that's made it easier for us to obtain the project debt that we require. Not not that we were having any problem, but think it just gives us the ability to say that the leverage, will be there with a very high degree of confidence. On the equity side, unfortunately, earlier this year, we did a couple of, capital raisings, and that put us in a relatively strong position going into this current situation. And I outlined the amount of capacity that we could build just using existing capital and you can assume that's either organic or it's a combination of organic and acquisition. In the total of what I said came to around 240,000 square meters.
We, up until now, we've always raised
the equity capital we need
at the holding company level. But we are always continuously approached by investors who are seeking to partner with us at the project level. But that's something we keep an open mind about. So I think it's very, something really that I'd like you in the market to take away that we're not beholden to the public equity market to raise the capital that we need, is simply a question of looking at what our options are and what is the lowest cost of equity capital available to us at the time when we need it.
Thank you. Our next question comes from the line of Robert Gutman from Guggenheim Partners.
Hi, thanks for taking my question. Can you just talk about the trend in accelerated move ins? It looks like the Part of the beat in the quarter was the Chengdu site that was delivered early. I believe that was 94% pre leased. What's the outlook for the pace of the accelerated pace of move in timing as we roll through the next few quarters?
Hi, Rob. It's Dan here. It's a curious one, isn't it? Because it happened at a time when all the indications from the tech supply chain is that the opposite should be happening, right? And it wasn't one customer in one place.
If you really drill down into the details in the appendix drive learnings presentation, you'll see that there's, I think, 7 or 8 data centers, which came into service the beginning of this year, which were already somewhere between around 50% to 80% utilized occupied which is very rapid by any one standards. Why is this? So there's a variety of reasons because it's not one customer, it's not one place. And some of it is related to new products. Some of it is related to some promotional activities.
Because a lot of it is just correlated with the growth of the cloud. Going forward, it's maybe too early to say, we get delivery notices from our customers, they give us around 3 months plus notice of their moving intentions. So we can forecast around that But beyond that timeframe, we tend to forecast based on what it says in the customer contract. So there's a bottom line, a delivery schedule, we call it minimum commitment in a customer contract. And that, that's the that underwrites whatever guidance or forecasts that we make.
For now, I won't change our usual practice. I will leave it to kind of upside, and, yes, present, present outcome if indeed the customers move in faster.
That's great. Thank you.
Thank you. Our next question comes from the line of Gokul Hari Hammond from JP Morgan. Please ask your question.
Yes. Hi. Thanks for taking my question. First of all, Dan, could you elaborate a little bit more on your comments about the operating leverage that could start to kick in going into the next year or so. I think we've started talking about SG and A coming down to about 10, 11% level and potentially could be even lower.
2nd, could you talk a little bit also about, what are your, rough CapEx expectations given the pipeline of demand that you're seeing, as well as the entry into potentially one more new Tier 1 market, if we leave the M and A aspect aside, which I think you're waiting on timing, etcetera, the right timing organic basis, could you talk a little bit about what could be the kind of CapEx that we should be thinking about? Is the number that you're spending this year roughly the kind of kind of ballpark that we should be thinking. And one last question, a quick one is, could you talk a little bit about the Hebei project economic now that at least one of the data centers is pretty much stabilized. Our NOI margin in her Bay, quite high compared to the normal data center operation given the the AFP and the utility cost path through structure is different? Thanks.
Thanks, Mike. If I
could have guessed, you're going to ask a few questions.
We talk about the operating leverage at two levels at the data center level and at the, corporate overhead level. At the data center level, it does tend to fluctuate. We bought a lot of capacity into service late last year and early this year, And then that had a result of actually, reducing or lowering our NOI margin. And as we've gone through the year, utilization rate has increased by, I think, 3 or 4 percentage points. And the proportion of our area of service, which is stabilized, has also increased by 3 percentage points.
So that's what's raised the adjusted NOI. But I have to say when I look over the next 3 or 4 quarters, it's not going to go up in a straight line. However, leverage on the corporate overheads, I think that can be a very significant feature over the course of next year. We talked about this before. We have a lot of corporate overhead which is related to growth in terms of sales and marketing, project sourcing, design, procurement, construction management, and of course funding as well as some pre operating costs, which are included in G And A.
But those costs don't really need to scale. We're still operating in the 5 tier 1 cities. It may increased by 1 or 2, but we're not going all over the map. So I do think that we expect to achieve quite significant operating leverage on corporate overheads. Over the next year.
In terms of, capital expenditures, if you calculate from, we've been disclosing cost to date and cost to complete, for our in service and under construction capacity. But if you look at the under construction capacity and you calculate the total cost, you'll see it comes to less than 60,000 RMB, which current exchange rates is under 9000 U. S. Dollars. That's clearly lower than what we've talked about.
In the last couple of years. And it's an indication of the initiatives that we've taken around supply change supply chain management and scale economics coming through. But when we look at the CapEx for next year, although it's too early for me to give guidance. I think I can go on record and say that it's not going to be materially higher than this year's number. It will be higher, but not materially higher.
Yes, as regards her pay, In total, it's 3 data centers, which represent less than 10% of our total area committed. So I don't want to call out too much about those 3 data centers, otherwise it's going to over complicate. But you are right. The revenue per square meter is lower than our average. The data center level margin or NOI margin is higher.
And the project return is at the low end of our range, but because of the build to suit customer contract, We were able to finance these projects with a lower overall cost of capital. So the spread over our cost of capital was actually, quite attractive. I've disclosed just for the third quarter and second quarter, what the revenue per square meter MSR per square meter would have been without without the Zhengbei, without the Herbei projects. If we, if I look at the NOI margin or EBITDA margin, the impact of those projects was not very significant in those two quarters.
Okay, got it. Thank you.
Our next question comes from the line of Frank Loven from Raymond James. Please ask your question.
Great. Thank you. Can you talk to us a little bit about the EBITDA margins? It's been a nice uptick. Where do you think those can ultimately go to?
And remind us kind of what the margins are on the stabilized properties. And then just as a follow-up, and I apologize if you mentioned this earlier, but have you what is the current status of any deals that you've sourced from the CyrusOne relationship? And when do you expect to see some projects from that?
Okay, Frank. Hi, it's Dan here. I'll go first on the EBITDA margins. I know what you and Go Build answers are getting at. You want to know how quickly our EBITDA margins are going to go up.
Yes. The first target, that we'd like to feel threshold that we'd like to cross is 40%. Incidentally, we IPO just 2 years ago, just over 2 years ago, we just had a 2 year anniversary. At that time, we targeted to reach 40 percent EBITDA margin, at the end of 2018. And I think you can see that we're on track to achieve that.
Despite the fact that we're growing our growth is 2 to 3 times what we expected at the time of the IPO, which also, implies a very significant growth drag that we have not factored in. So I think it's a good achievement for us to have got here. And when you look at the stabilized part of the portfolio, I mentioned in the 3rd quarter, at the NOI level, it was over 55%. But when you add in the part that is not stabilized, which is ramping up, it brings the total down to 48.5%. And then you that won't go up very quickly, those Goebels earlier question will go up and down.
It will trend up, but it won't go up, very quickly. But then you have to deduct from that the SG and A, which is currently over 10%, but which will come down, I think, to the lowest levels you've seen for any U. S. Data center service provider and maybe less. So I think maybe that gives you some indication of where the EBITDA margin will go to over the next 1 to 2 years.
Okay, great. And on any CyrusOne benefits that you may be able to
Yes, I think so far we'll still cook some deal right now. But what we see is that currently, the China government's open the door and then let a lot of the financial institution and other let's say, a multinational company coming. So what we see, we are working very closely 1 to try to catch up this select set a couple of the segment and a vertical to which the company has the high intention to come to China right now. I think we are giving the time we will, have the result. I'm so I'm very confident for that.
Okay, great. Thank you. Thank
you. Our next question comes from the line of Colby Simmises of Cowen and Co. Please ask the question.
Great. Thank you. Just a few First off, just in light of where the stock's gone and you're continuing needs to finance. Just trying to get a sense of what comfort level you have on leverage and where that could potentially go over the near to medium term? And then secondly, I think when we look at the macro There's obviously a lag in terms of data centers in terms of how people are purchasing those types of services from companies like yours.
And I think the concern is that as we start to see potentially a slowdown in 2018 as we go into 2019, we're not going to see that, show up in your leasing results perhaps for another year or so because a lot of the projects to your point that you're signing now and likely we'll sign for the next few quarters are from deals that you've been working on for perhaps a year or 2 at this point. What comfort level do you have that, that those trends as we go into 2019, can be sustained based on what your own observations are of the underlying businesses of your customers. And then just my last one, you mentioned in your prepared remarks, you're looking at potential edge expansions in some of the current Tier 1 markets that you're already in looking to potentially industrialize how you go about building data centers. I was wondering if you could just give us a little bit more color on what that actually means and what the potential financial impact to your business could be perhaps over the next year or 2? Thank you.
Yes, I think we will go for a time.
Let me let me explain a little bit about the next year's outlook. I think a lot of people say, oh, maybe a little bit the server shipment that go down and This is not an effective direct effect on what I just explained because a couple of reasons. Number 1, we have the right customer. And our customer, what the business which we host actually is very early stage in China. They all grow in a very significant way.
And based on my latest stage conversation with all the business unit heads, from our key customers, they all talk to me. There's nothing changed in next year. So this is number 1. This is a very bottom up conversation in the last 4 weeks is the number 1. Number 2, I would say based on our sales pipeline, I can tell to maintain this year's level sales booking in next year, I'm fully confident because we already had 2.5 times of the pipeline coverage of our target.
So we are, we are just finished our sales plan in next year. So I'm very confident to maintain this year's level. New bookkeeping next year. And then on the other hand, I think as we as I just talked in my presentation, I think we keep, add on new large scale customer in our customer list. This is quite a diverse by our customer base.
And all the unique Chinese unicorns and the, we still have the long term in this which haven't been our customer yet. So we are confident to add a more customer like the JD NetEase and Kingsoft in the next few quarters. Okay. Let me talk about a little bit of campus. Type development.
Number 1, I think the current environment is a lot of the local governments. Now they changed the attitude a lot of the edge tone of the Tier 1 city, they keep, pursuers, try to ask, invite the GDS to buy some land or lock up some resource and make some future investment in that area. This led us and they offered more better deal than before and they are eager to get GDS name in their new investment So now that letter GDS has a position to have a stronger position to gather better deal, better deal in the future, but we are still evaluating right now. This is number 1. That means future, we try to build our land bank in the future.
But it's early, it's a little bit early to talk about, to inject the capital right now. But if we try to maximum squeeze the landlord and the municipal local governments, and then we try to gather maximum condition for us. So I think it's a good time to get into this a project right now. But it's so we are we will have a bunch of way to get in the best deal and currently, it's not directly affects our equity right now. But on the other hand, we are pretty We do know a lot from the CyrusOne, which should they have this capability to, do you have the track record to build up high skilled campus type leaders in there.
And we have a lot of the discussion with them with their technical team a lot of the new technology like the VR structure, a lot of the fabrication type data center skill, we learn a lot from them. This is what we this is the meaning where we have to we just say talked about industrialize the future data centers to fulfill the high scale customer. And then standardize how I'll give on.
Okay. Colby's first question about how we think about leverage. The main focus is actually on the leverage at the project level. We inject equity into individual datacenter project companies and then leverage it with project debt. And typically it's 60 percent debt, 40 percent equity.
And then once the data center is stabilized, that translates into around three times debt to EBITDA. And if you look at our the disclosure, you look at the data centers, which are in service, you'll see many of them have lease rates or commitment rates of 95% to 100%. In fact, I think 17 have commitment rates of between 99% 100%. The customers, the counterparties behind these commitments are almost entirely investment grade, very well known companies, And they are entering into 6 to 10, I would say mostly 8 to 10 year contracts with us. Significant portion of those contracts don't have a right of early termination.
They all have very severe penalties. And I think only once in our history as a customer terminated. So if we look at the cash flow that can come from those contracts over multiple years relative to the amount of cash required to service the project debt, and it's covered multiple times. So we feel that the way our projects Our finance is actually very conservative. However, when you add it all up, we had stabilized data centers.
We have ramping up data centers We have data centers under construction. There's debt drawn down the data centers that have not yet reached optimum level of EBITDA, there's debt drawn down for data centers, which are pre operational and have no EBITDA. And is the aggregate of all that, which you see reflected in our consolidated net debt to EBITDA multiple. I mean, interestingly, as of now, we don't have a single financing facility with consolidated net debt to EBITDA multiple covenant in it. Nonetheless, appreciate that equity investors tend to focus on that metric, even though it may not be all that meaningful.
And we would like over time for that metric to come down to the kind of levels you see in the U. S. However, for now, with the very significant growth opportunity, which we have in front of us. I expect that, that multiple will stay at the kind of levels it's been, now and in the last few quarters, which is to say 7 to 8 times, maybe closer to 8 times.
Great. Thank you very much.
Thank you. Our last question comes from the line of Colleen Mckelum from Credit Suisse. Please ask your question.
Thanks very much. I'll just keep it short. There's 2 quick ones for me. And the first one is just guess, for William, it's regarding the larger customers, have finally, this year of come under a little bit of share price pressure partly because of their margins, they've been missing and their costs are a bit higher than people expected. Have they been turning around to you guys and putting further pressure on your lease rates and what they're paying you?
Now I realize that as you mentioned, you're in long term contracts with them. So obviously, we wouldn't expect something to change in near term numbers. But for forward contracts 2, 3, 5 years out, are you seeing any or healing any pressure from your customers, from your large customers on those lease rates? That's the first question. 2nd question, just a quick housekeeping one for Dan.
I saw that kind of net finance costs increased quite sharply quarter on quarter. Were there any one off costs in third quarter or is it just related to the increase in net debt that you alluded to in the prepared remarks? Because I see that the interest rates barely changed. Those are my two questions.
Okay, hi, Google. Thank you for asking question. I mean, for the, I think that the GDS current strategy stay on still stay on the Tier 1 market, but in general, I still will see the, the, let's say, the, the, in the Tier 1 market demand and the surprise do you have that huge gap right now. So we are we check Titus, state, state the current price level for in short term. But from a long term point of view, I think that now our customer is more smart, very smart they try to deploy a different application in a different type of the product of datacenter.
So different product of the datacenter actually the price is different. The cost is different. So it's early to talk about the price price difference. So our target, I would repeat that. Our target is to maintain our IRR because in the last couple last 12 or 18 months, we do we made a lot of effort to optimize our design and also drive down our development costs.
So this is that GDS has the ability, when, when they, the price, we get a pressure from the price, get a pressure from our customer, we still can maintain our IRR.
Yes, Colin, on your question about the effective interest rate, there was a simple reason, which is the convertible bond, which we issued, which has a 2% coupon. And if you excluded that and we just look at the effective interest rate for the rest of our debt makes these project term loans and working capital facilities. Effective interest rate would have been 6.7 percent, which is actually almost exactly the same as what it's been, over the 1st 9 months of this year.
Thank you. I'll now turn the call over to company for closing remarks.
Thank you once again for joining us today. If you have further questions, please feel free to contact GDS Investor Relations through the contact information on webcast or the Piacente Group Investor Relations. Thank you all.
This concludes today's conference call.