What does a DCR (Debt Coverage Ratio) of less than 1 indicate?

A Debt Coverage Ratio (DCR) of less than 1 implies that the asset's income is insufficient to meet its debt obligations. This ratio is calculated by dividing the net operating income (NOI) by the total debt service. When this ratio falls below 1, it indicates that the property's income is not enough to cover the debt repayments; in other words, the financial health of the asset is concerning as it is not generating adequate cash flow to support its debt financing.

In contrast, a DCR of greater than 1 would signify that the income generated exceeds the debt obligations, demonstrating that the asset is financially stable and able to cover its debt service. A DCR of exactly 1 means the income and debt service are equal, indicating a break-even situation without a surplus. Therefore, a DCR of less than 1 serves as a warning sign for lenders and investors that the asset may struggle financially, necessitating close monitoring or potential intervention.