GDS Holdings Limited (GDS) Q3 2018 Earnings Conference Call Transcript

GDS Holdings Limited (GDS 7.22%)
Q3 2018 Earnings Conference Call
Nov. 13, 2018, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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 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.

Laura Chen -- Investor Relations

Thank you, Joanna. Hello, everyone, and welcome to 3Q18 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.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 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 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's earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. GDS's 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's Founder, Chairman and CEO, William Huang. Please go ahead, William.

William Huang -- Founder, Chairman, and Chief Executive Officer

Thank you, Laura. 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 with sales, which is the leading indicator of our future revenue and 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 [inaudible] markets. With this addition, we stayed on track to double the next business we signed last year. At the same time, we delivered it so our customers around 14,000 square meters of additional revenue generating space. The utilization rate moved up to 68%. This proves another quarter in which our adjusted EBITDA grew by well over 20% quarter-on-quarter and 100% year-on-year.

Backing this up, we started the construction of four new projects and brought another four into service on time and within budget. We kept the sales and the capacity growth synchronized. The pre-commitment rate for areas under construction was 45%, based on signed contracts with significant more in the constructing process. Always, we ensured that all of our projects are fully financed with sufficient equity and a long-term positive bet. Overall, this performance demonstrates the resilience of our business and our ability to keep on beating pockets. We are once again raising our 2018 guidance for revenue and EBITDA.

Turning to Slide 4, a highlight of our sales achievement for this quarter was three significant new customers [inaudible]. Namely JD, Kingsoft, and NetEase. This was a direct result of our targeting of large-scale cloud and internet customers who we believe and strategically important for our franchise because of our 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. bank, which is moving fast to capitalize on the financial services liberalization in China. [Inaudible] in this quarter, new customers accounted for over 50% of our new business. This demonstrates that we keep diversifying our top customer base. At the same time, this does not mean our existing customers are pulling back. Based on what we see in our sales pipeline and what our top customers shared with us, we don't see any let-up in the current level of demand.

There is a lot of data pointing to a slowdown in parts of the digital economy as a result of macroeconomics and the geopolitical sectors. How is this affecting us? The short answer is that we don't see it. I think there are three main reasons to expend apparent disconnects. First of all, our business is geared toward the growth of cloud platforms. As everyone knows, public cloud in China is still at an early stage of development. The I segment is just at 15% of the U.S., but a forecast to grow at nearly double the CAGR over the next five years. Alibaba, the market leader, has just reported 90% year-on-year revenue growth for its cloud business, which is similar to our growth rate.

Furthermore, our largest customers still have a long way to go to migrate all their own IT onto their cloud platform. This [audio cuts out] internal demand is not reflected in the disclosed revenue figures. The second reason is new technology, in particular AI. More and more applications are becoming AI-enabled. It's a major focus area for Chinese tech leaders. They expect to create a lot of economic values from AI over the next few years. From a technical perspective, AI requires more data, more storage, and more computations. Many AI applications are also highly latency sensitivity. This is increasing demand for data centers like ours in Tier 1 markets.

The third reason is that our largest scale customers secured their supplies of data center resource based on 12 to 24 months planning time horizon. The capacity to fulfill their assignments 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 and 2020. This is why we have a large backlog and high visibility for future growth.

In summary, we remain highly confident about the sales outlook based on our existing and new customers relationships and evolving technology. Let's turn to Slide 6. I have talked about demand. Now let me talk about supply. There are many changes to creating new resource supply in Tier 1 markets due to the pressure on real estate and the 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 initiate new projects, we consistently restock our resource pipeline. In addition to what you see currently under construction, we have another 100,000+ square meters of capacity held for future development. Our ability to maintain continuous supply of Tier 1 markets is a critical consideration for high-scale customers. No other service provider in China comes close to us in terms of data center platform. This is why we don't see any significant change in the competitive [inaudible].

Going forward, we are evaluating [inaudible] developments on the edge of the Tier 1 markets to industrialize our capacity extension, making it easier and more efficient for us to scale up. We are also actively considering entering one or two new Tier 1 markets. We expect to make announcements about such projects over the next couple of quarters. We have a great track record of delivering results to customers for the expansion.

Although we don't talk about it very often, we also have a great track record of delivering exceptional accreting performance. We were recently put to an extreme test. During September, Southern China was struck by the worst typhoon in 100 years. [Inaudible] we had eight [inaudible] data centers in the eye of the storm. Despite over 500 failures in the power grid and the damage to other critical infrastructure in the [inaudible] regions, our data centers ran nonstop, without any breach of SO8. 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.

Daniel Newman -- Chief Financial Officer

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 improved 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%, 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 second 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 3Q18 declined slightly from the previous quarter. However, if we exclude the impact of the three Herbe projects, which came into service around mid-year, the MSR actually increased. An MSR of 2,759 RMB per square meter excluding Herbe, 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 on 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 centers area and service is now over 50% stabilized, compared with 47% in 2Q18. The increase in the stabilized proportion contributed to the margin improvement.

At the corporate level, on Slide 17, SG&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&A is down to 6% of service revenue.

Turning to Capex on Slide 18, in 3Q18, our Capex paid was around 1.1 billion Rmb, including 111 million Rmb related to acquisition consideration. For the year-to-date, our cumulative Capex paid was around 3 billion Rmb. Most of the cost of the Hong Kong real estate acquisition will appear in 4Q18 Capex. As you can see from the breakdown of Capex incurred, it will cost an estimated 2.6 billion Rmb, or $380 million U.S. dollars 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 projects under construction, the estimated Capex per square meter is around 60,000 Rmb or $8,800 U.S. dollars per square meter at current exchange rates, which includes how we have been lowering costs and maintaining our returns at target levels.

Turning to Slide 19, during 3Q18, our net debt increased from 7.2 billion Rmb to 8.8 billion Rmb. Part of the increase was due to the capital leases for the SH9 and BJ6 properties, and part was due to the settlement of Capex payables. Our net debt to last quarter annualized adjusted EBITDA ratio decreased from 7.8x to 7.3x. However, in 4Q18 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 financed 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 3x. 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 lifecycle is assured. Once projects are stabilized, our practice is to refinance on a longer-term basis. This means that we always have a lot of project finance going on. In 3Q18, we completed four project finance transactions for a total facility amount of 792 million Rmb. Currently, we have another five projects financings ongoing, for a total facility amount of 2.9 billion Rmb, out of which 808 million Rmb is refinancing.

The Chinese 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 three 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 allocation to new projects, which we will announce in the future. We are confidence of our ability to leverage this capital in the same way as we have always done. With a combination of available capital at leveraged 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 3Q18, 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 generation 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 3Q18 based purely on what is already contracted.

Finally on page 21, our 3Q18 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 FY18 revenue and adjusted EBITDA to not less than 2.75 billion Rmb and 1.02 billion Rmb, respectively. The new numbers imply year-on-year growth of over 70% of revenue and over 99% for adjusted EBITDA, in both cases exceeding the year-on-year growth rate we achieved in FY17. At the same time, we're maintaining our FY18 Capex guidance of 4 billion Rmb unchanged.

With that, I will end the formal part of my presentation, and we would now like to open the call to questions. Operator?

Questions and Answers:

Operator

If you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the # key. Once again, *1 for questions. Our first question comes from John Atkin from RBC. Please ask your question.

Jonathan Atkin -- RBC Capital Markets -- Analyst

Thank you very much. I was interested, I guess a question for William or for Dan. As you look at potentially acquiring projects that are under way by smaller developers, what does the pipeline look for small, tuck-in M&A? 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. Then lastly on Slide 18, you talk about your construction program. Just under half of the area is pre-committed. Three of the projects that you list there are 100% pre-committed. 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.

William Huang -- Founder, Chairman, and Chief Executive Officer

Hello, John. This is William. What we see there in the market, what happened is -- and we think is purely a lumpy, there's a lumpy position opportunity in the market. So we select the deal very carefully, so we have more pipeline than before. But that let us can select, use a very high standard to select a target acquisition deal. But we're still in the early stages to evaluate. There's a lot of [inaudible] project right now. Dan, do you want to add some more color?

Daniel Newman -- Chief Financial Officer

From 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 third quarter, it was over 55%. And about the projects, if I [inaudible] correctly, the projects which are under construction are not yet pre-permitted. So I think we provided some information about when those projects will come in service.

So we just look at the two projects that will come in service first after next year which are not yet pre-committed. One of them, Beijing 4, for now or from the section, we positioned that for enterprise and financial institution customers who typically don't pre-lease. We may begin to take commitments three months before it comes into service. I said for now because there is some pressure from a 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 come into service in the first half of '19, which is not yet pre-committed, is Phase 3 of what we call our Shenzen 5 data center. It's a very huge building, relatively centrally located in Shenzen. It's highly marketable. Right now, it's a toss up as to whether it goes go an existing customer in that building, or whether we are free to offer it to other customers. Either way, that's a very nice resource to have on our hands. Does that answer your question, John?

William Huang -- Founder, Chairman, and Chief Executive Officer

I want to add on, this is on the M&A deal. No. 1, currently what we see in the pipeline is much stronger than before, but that's not to say we would take action immediately. In a lot of have more opportunity to get a view. But our strategy is to keep on organic growth. That's our priority.

Jonathan Atkin -- RBC Capital Markets -- Analyst

Thank you. That does answer the questions. Then lastly, just given the strong demand and the desire to grow including potentially in a new Tier 1 market, how do you think about your various financing options to fund this expansion?

Daniel Newman -- Chief Financial Officer

John, there's debt and there's equity. Right now, the position in terms of the banking markets, 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. That's made it easier for us to obtain the project debt that we require. Not that we were having any problem, but I think it gives us the ability to say that the leverage will be there with a very high degree of confidence.

On the equity side, fortunately earlier this year we did a couple of capital raisings. That put us in a relatively strong position going into this current situation. 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. The total of what I said came to around 240,000 square meters.

Up until now, we've always raised the equity capital we need at the holding company level, but we're always continuously approached by investors who are seeking to partner with us at the project level. That's something we keep an open mind about. I think it's really something that I'd like you and the market to take away. That we're not beholden to the public equity market to raise the capital that we need. It's 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.

Jonathan Atkin -- RBC Capital Markets -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Robert Gutman from Guggenheim Partners. Please ask your question.

Robert Gutman -- Guggenheim Securities -- Analyst

Thanks for taking the question. Can you just talk about the trend in accelerated move-ins? It looks like part of the beat in the quarter was the Chengzou site that was delivered early. I believe that was 94% pre-leased. What's the outlook for the accelerated pace of move-in timing as we roll through the next few quarters?

Daniel Newman -- Chief Financial Officer

Hi, Robert. 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 was 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 of our earnings presentation, you'll se that there's I think seven or eight data centers which came into service at the beginning of this year which were already somewhere between 50% to 80% utilized, occupied, which is very rapid by anyone's standards.

Why is this? There's a variety of reasons. Because it's not one customer and it's not one place. And some of it is related to new products. Some of it is related to some promotional activities. And a lot of it is just correlated with the growth of the cloud. Going forward, maybe it's too early to say. We get delivery notices from our customers. They give us around three months-plus notice of their move-in 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 contractual commitment, and the customer contract, and that underwrites whatever guidance or forecasts that we make. For now, I won't change our usual practice. I will leave it to come upside and pleasant outcome, if indeed the customers move in faster.

Robert Gutman -- Guggenheim Securities -- Analyst

That's great. Thank you.

Operator

Thank you. Our next question comes from the line of Gokul Hariharan from J.P. Morgan. Please ask your question.

Gokul Hariharan -- J.P. Morgan Securities -- Analyst

Thanks for taking my questions. First of all, Dan, could you elaborate a little more about your comments about the operating leverage that could start to kick in going into the next year or so? I think you started talking about SG&A coming down to about 10% to 11% level and potentially it could be even lower. Second, could you talk a little bit also about what are your ramp 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&A aspect aside, which I think your reading on timing, etc. the right timing through organic means.

Could you talk a little bit about what would be the Capex that we should be thinking about? Is the number that you're spending this year roughly the kind of ballpark that we should be thinking? One last question, quick one, is could you talk a little bit about the Herbe project now that at least one of the redevelopments is pretty much stabilized? Are NOI margins in Herbe quite high compared to the normal rate of operations, given the ASP and the [inaudible] passthrough structure is different? Thanks.

Daniel Newman -- Chief Financial Officer

I could have guessed you would ask those questions. We talk about the operating leverage at two levels. The data center level and at the corporate overhead level. At the data center level, it does tend to fluctuate. We brought a lot of capacity into service late last year and early this year. Then that had a result of actually reducing or lowering our NOI margin. As we've gone through the years, utilization rate has increased by I think 3 or 4 percentage points, and the proportion of our area of service, which has 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 three or four 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&A. But those costs don't really need to scale. We're still operating in the five Tier 1 cities. It may increase by one or two. 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 costs to date and costs 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 at current exchange rates is under $9,000 U.S. dollars. That's clearly lower than what we talked about in the last couple of years. It's an indication of the initiatives that we've taken around supply chain management and scale economics coming through.

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. As regards Herbe, in total it's three data centers which represent less than 10% of our total area committed. So I don't want to call out too much about those three 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 low 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 the second quarter what the revenue per square, MSR per square meter would've been without the Herbe projects. If I look at the NOI margin or EBITDA margin, the impact of those projects was not very significant in those two quarters.

Gokul Hariharan -- J.P. Morgan Securities -- Analyst

Okay. Got it. Thank you.

Operator

Thank you. Our next question comes from Frank Louthan from Raymond James. Please ask your question.

Frank Louthan -- Raymond James & Associates -- Analyst

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? Remind us what the margins are on the stabilized properties. Just as a follow-up, as I apologize if you mentioned this earlier, but what is the current status of any deals that you've sourced from the Cyrus One relationship and when do you expect to see some projects from that? Thanks.

Daniel Newman -- Chief Financial Officer

Frank, hi, it's Dan here. I'll go first on the EBITDA margins. I know what you and Gokul and others are getting at. You want to know how quickly our EBITDA margins are going to go up. The first target or threshold that we'd like to cross is 40%. Incidentally, we IPO'd just two years ago, just over two years ago. We just had a two-year anniversary. At that time, we targeted to reach 40% EBITDA margin at the end of 2018. I think you can see that we are on track to achieve that, despite the fact that our growth is two to three times what we expected at the time of the IPO, which also implies a very significant growth drag that we had not factored in.

So I think it's a good achievement for us to have got here. If you look at the stabilized part of the portfolio, I mentioned in the third quarter the NOI level 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%. That won't go up very quickly. That was Gokul's earlier question. It'll 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&A, which is currently over 10%, but which will come down, I think, to the lowest levels we'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 one to two years.

Frank Louthan -- Raymond James & Associates -- Analyst

Okay, great. And any Cyrus One that you may have --

William Huang -- Founder, Chairman, and Chief Executive Officer

I think so far [inaudible] view right now. But what we see is that currently the Chinese government opened the door and let a lot of the financial institutions and other, let's say market national companies come in. So what we see, we are working very closely with Cyrus One to try to catch up with a couple of these segments and as a vertical to which the company has the highest intention to come to China right now. So I think given the time, we will have the result. I'm very confident for that.

Frank Louthan -- Raymond James & Associates -- Analyst

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Colby Synesael from Cowen & Co. Please ask your question.

Colby Synesael -- Cowen & Company -- Analyst

Thank you. Just a few. First off, just in line of where the stocks gone and your continued 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. 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. I think the concern is that as we start to see potentially a slowdown in '18 as we got into '19, 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 will sign for the next few quarters are from deals that you've been working on for perhaps a year or two at this point.

What comfort level do you have 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? 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 two? Thank you.

William Huang -- Founder, Chairman, and Chief Executive Officer

Let me explain a little bit about the next year's outlook. I know people say maybe the silver shipment goes down. This is not directly affect us, what I just explained because a couple of reasons. No. 1, we have the right customer. Our customer, the business which we host actually is very early stage in China. They're all growth in a very significant way. Based on my latest stage conversation with all the business units have from our key customers, they all talk to me there's nothing changed in the next year. So, given No. 1 this is a very bottom-up conversation in the last four weeks is No. 1. No. 2, I would say based on our sales pipeline, I can tell to maintain this year's levels sales booking in next year, I'm fully confident because we already have 2.5x of the pipeline coverage of our target. So we are just finishing our sales plan in next year, so I'm very confident to maintain this year's level new bookings in next year.

On the other hand, I think as I took part in my presentation, I'd say we keep add-on new large-scale customers in our customer list. This is [inaudible] by our customer base. In all the Chinese [inaudible], we still have the long-term list, which haven't been our customer yet, so we are confident as more customers like JD, Kingsoft in the next few quarters.

Okay. Let me talk about a little bit of campus-type development. No. 1, I think the current environment is a lot of local government, now they change their attitude. A lot of the [inaudible] of a Tier 1 city, they keep pursue us, invite GDS to buy some land or lock up some resource and make some future investment in their area. This led us, they offered more, a better deal than before. They are eager to get the GDS name in their new investment list. Now that let's GDS have the position to have a stronger position to gather a better deal, faster deal in the future, but we are still invariating right now.

This is No. 1. That means future we try to build our land back in the future, but it's early, it's a little bit early to talk about to inject the capital right now. But we try to maximum squeeze the landlord, the local government, and we try to gather the maximum condition for us. So I think it's a good time to get into this project right now, but so we will have a bunch of ways to get in the best deal, and currently, it does not directly affect our equity right now. But on the other hand, we are pretty, we learn a lot from Cyrus One, which should have the capability to [inaudible] to build up high-scale, campus-type lease agreement and we have a lot of discussions with them, with their technical team.

A lot of the new technology like BI structure, a lot of the fabrication type of data center scale. We learn a lot from them. This is the meaning, what we just talked about industrialize the future data center to fulfill the high scale customer. And to [inaudible].

Daniel Newman -- Chief Financial Officer

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 data center project companies and then leverage it with project debt. Typically, it's 60% debt, 40% equity, and then once the data center is stabilized, that translates into around 3x debt to EBITDA. If you look at 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% and 100%. The customers, the counterparties behind these commitments are almost entirely investment grade, very well-known companies. They are entering into 6 to 10, OK, and I would say most 8- to 10-year contracts with us.

A significant portion of those contracts don't have a right of ability termination. They all have very severe penalties. I think only once in our history has a customer terminated. So we look at the cash flow that can come from those contracts over multiple years 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 are financed is actually very conservative. However, when you add it all up, we have stabilized data centers, we have ramping up data centers, we have data centers under construction. There's debt flowing down for data centers that have not yet reached optimal level of database. There's debt flowing down for data centers which are pre-operational and have no EBITDA.

As the aggregate of all that, which you see reflected in our consolidated net debt to EBITDA multiple. Interestingly, as of now, we don't have a single financing facility with a consolidated net debt to EBITDA multiple covenant in it. Nonetheless, I appreciate that equity investors tend to focus on that metric, even though it may not be all that meaningful. 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 multiple will stay at the kind of levels it's been now and in the last few quarters, which is to say 7x to 8x, maybe closer to 8x.

Colby Synesael -- Cowen & Company -- Analyst

Great. Thank you very much.

Operator

Thank you. Our last question comes from the line of Colin McCallum from Credit Suisse. Please ask your question.

Colin McCallum -- Credit Suisse -- Analyst

Thanks very much. I'll just keep it short. There's two quick ones for me. The first one is just I guess for William. Regarding the larger customers, for finally this year obviously come under a little bit of sheer price pressure partly because of their margin they've been missing and their costs 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? I realize that, as you mentioned, you're in long-term contracts with them so obviously we wouldn't expect anything to change in near-term numbers, but for forward contracts, 2-5 years out, are you seeing or feeling any pressure from your customers, from your large customers on those lease rates? That's the first question.

Second question is just a quick housekeeping one for Dan. I saw that net finance costs had increased quite sharply quarter-on-quarter. Were there any one-off costs in third quarter or is it just related to the increasing net debt that you alluded to in the prepared remarks? Because I see that the interest rates barely changed. Those are my two questions. Thank you.

William Huang -- Founder, Chairman, and Chief Executive Officer

Colin, thank you for asking the question. I think the GDS strategy is to still stay on the Tier 1 market, but in general, I feel we're seeing let's say in the Tier 1 market demand and surprise they have that huge gap right now. So we try to stay the current prices level in the short-term. But from a long-term point of view, I think now a couple of [inaudible] smart, very smart. They tried to deploy a different application in a different type of the product of the data center. So different product of the data center, actually the price is different, the cost is different. It's early to talk about the price difference. Our target, I will repeat that. Our target is to maintain our IRR. Because in the last 12 or 18 months, we made a lot of effort to optimize our design and also drive down our development costs. So this is how GDS has the ability when we get pressure from our customer, we still can maintain our IRR.

Daniel Newman -- Chief Financial Officer

Colin, on your question about the effect of interest rate, there is a simple reason, which is the convertible bond which we issued, which has a 2% coupon. If you excluded that and we just looked at the effect of interest rate for the rest of our debt, mainly project term loans and working capital facilities, the effective tax rate would've been 6.7%, which is actually almost exactly the same as what it's been over the first nine months of this year.

Colin McCallum -- Credit Suisse -- Analyst

Got it. Okay. Thanks very much.

Operator

Thank you. I'll now turn the call back to the company for closing remarks.

Laura Chen -- Investor Relations

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 the website, or [inaudible] investor relations. Thank you all.

Operator

Thank you. This concludes today's conference call. You may now disconnect the line. Thank you.

Duration: 57 minutes

Call participants:

William Huang -- Founder, Chairman, and Chief Executive Officer

Daniel Newman -- Chief Financial Officer

Laura Chen -- Investor Relations

Jonathan Atkin -- RBC Capital Markets -- Analyst

Robert Gutman -- Guggenheim Securities -- Analyst

Gokul Hariharan -- J.P. Morgan Securities -- Analyst

Frank Louthan -- Raymond James & Associates -- Analyst

Colby Synesael -- Cowen & Company -- Analyst

Colin McCallum -- Credit Suisse -- Analyst

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