TROOPS, Inc.'s Strategic Move into Malaysia's Co-Living Market: Balancing Risk and Growth with Convertible Notes

TROOPS, Inc. (NASDAQ: TROO) is making a bold play in Asia's rapidly growing co-living and co-working sector with its recent Letter of Intent (LOI) to acquire a 30.6% economic stake in Malaysia-based The Cara Hotel via Y Concept Holding Limited. The deal, structured through convertible notes and staged ownership, highlights a sophisticated approach to mitigating valuation risks while capitalizing on a sector primed for growth. Here's why investors should pay attention—and what to watch for next.

The Convertible Note Structure: A Hedge Against Share Price Volatility

The acquisition's payment mechanism is central to its risk management strategy. TROOPS will settle the transaction using convertible notes valued at 80% of the lower of two benchmarks:
1. The closing share price on the LOI's signing date.
2. The average closing price over the prior 60 trading days.

This discounted pricing ensures TROOPS pays less if its stock price dips, shielding it from volatility. For example, if TROOPS' stock were trading at $5 today, the note's value would be set at $4—a 20% discount. This structure is particularly prudent given the company's current struggles, including a recent NASDAQ non-compliance notice due to low stock prices.

Moreover, the repurchase option allows TROOPS to reclaim shares at prevailing market prices if advantageous. This flexibility could help the company avoid over-dilution if its stock rebounds. Meanwhile, the put option (granting the vendor the right to sell its remaining stake later) creates a path to majority control without upfront commitment—a critical feature in a sector where scale matters.

Growth Potential: Asia's Flexible Workspace Boom

The co-living and co-working market in Asia is booming, driven by urbanization, housing affordability crises, and a rise in remote work. Malaysia's capital, Kuala Lumpur, is no exception. A 2024 report by JLL estimates Asia-Pacific's flexible workspace market could grow at a 7% CAGR through 2028, with co-living demand surging as younger professionals prioritize affordability and community over traditional housing.

The Cara Hotel's focus on hybrid spaces—combining living and working amenities—positions TROOPS to capture this trend. Synergies with TROOPS' existing real estate and fintech businesses (e.g., property investment, migration advisory) could further amplify returns.

Balance Sheet Flexibility: A Double-Edged Sword

While TROOPS' use of convertible notes preserves cash and avoids immediate equity dilution, the strategy carries risks. If TROOPS' stock price rises significantly before the notes mature in August 2025, holders might convert notes into shares at the original discounted price, increasing dilution. This is why the capped call transactions—which limit the effective conversion price—matter. They reduce the risk of excessive share issuance if the stock soars.

Another concern: TROOPS' $51.9 million legal judgment and NASDAQ listing risks could strain liquidity. However, the staged acquisition structure ensures the company commits only 30.6% upfront, allowing it to assess The Cara Hotel's performance before scaling further via the put option.

Investment Takeaways

1. For Bulls: The convertible note terms and staged approach reduce upfront risk, while the co-living sector's growth tailwinds justify optimism. If TROOPS can stabilize its stock price and secure regulatory approvals, the deal could be a gateway to a high-potential market.
2. For Bears: The company's near-term financial hurdles (e.g., NASDAQ compliance) and the convertible notes' dilution risk remain red flags. Investors must monitor whether TROOPS can execute synergies and improve its balance sheet.

Final Recommendation

TROOPS' move into Malaysia's co-living market is a strategic, if risky, bet on Asia's urbanization wave. The convertible note structure cleverly mitigates valuation exposure, but success hinges on stabilizing its stock price and navigating regulatory hurdles. For investors comfortable with volatility and willing to bet on long-term sector growth, TROOPS could offer asymmetric upside. However, the company's immediate liquidity challenges warrant caution—this is a high-risk, high-reward play best suited to aggressive growth investors.

Stay tuned for updates on regulatory approvals and due diligence results, which will clarify the deal's viability by late 2025.