Growing Blue Flag Capital acts on management needs

BOSTON — When Blue Flag Capital started focusing solely on investing in hospitality assets five years ago, the company’s CEO knew there would come a time when it would also become involved in the operational side.

That time is now, according to Blue Flag CEO Jason Brown.

“We’ve always come from scenarios where we have both investment and operational arms,” said Brown, who is also the co-founder of Blue Flag. “When we started Blue Flag, we wanted to focus on real estate and get discretionary capital through something that we didn’t think a lot of people were looking at, and that was the last area to be entrepreneurial.”

Jason Brown

Now that Blue Flag has scaled up (with 13 properties and over $1 billion in assets in its portfolio), Boston-based Collared Martin Hospitality (CMH) was created to manage some, and eventually all, of Blue Flag’s assets. The company will be led by CEO Steve Rubin, who was previously chief commercial officer for Ring on Hook, which operated four of Blue Flag’s properties.

Brown, who is also co-founder and chairman of CMH, worked with Rubin at Kimpton Hotels & Restaurants years ago. Blue Flag does not own CMH, but Brown said the two are intertwined with investors on both sides.

“That’s important because when we look at the world, we think there are very few components left where you actually control the real estate and you control the operating side and branding side all over one vertically integrated umbrella,” Brown said.

Currently, CMH operates eight hotels from Blue Flag’s portfolio (two of which are under renovation). Rubin said the job was too good to pass up.

“The opportunity for CMH is incredible,” Rubin said. “To have a management company that starts with this type of portfolio from day one allows us to build that team, build that culture, add in the right tech stack and continue to grow, which is phenomenal.”

Faraway Martha's Vineyard in Massachusetts is one of two Faraway properties that Collared Martin Hospitality manages.

Inside the portfolio

Blue Flag is currently investing out of its third discretionary fund, a combination of a $300 million joint venture with Bain Capital Real Estate and a $150 million fund from its existing investors.

“Our thesis has been since we’ve been doing this and continues to be ultra-high-end, high-barrier-to-entry markets where we believe two things are true. One, a lot of hotel stock historically has been in individual ownership and hasn’t really been touched in a long time and deserves a lot of love going back into it,” Brown said. “Then, the supply-demand dynamics, particularly where we think the discretionary dollars being invested are going into these markets that are themselves the demand generators: the Nantuckets, the Martha’s Vineyards, the Sag Harbors and the Jackson Holes. So that’s where we’re investing.”

For the most part, we’re looking at value-add older assets that have been around for a couple of decades. A lot of them have been bolted onto over time, but not with a lot of consistency.

Jason Brown

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Blue Flag isn’t done looking for those kinds of assets. Brown said the company will eventually deploy about a billion more in capital, which makes the formation of CMH even more important.

“We want to make sure that [the hotels] are being serviced by a team that understands and is incentivized [so they] are being operated up to the standards that our guests and our investors expect,” he said.

Brown said Blue Flag has identified about 25 markets internationally, which it has whittled down to 15 over the past couple of years, including five markets that share the same dynamics that the company is already in.

“For the most part, we’re looking at value-add older assets that have been around for a couple of decades,” Brown said. “A lot of them have been bolted onto over time, but not with a lot of consistency. So, we go in and reimagine those.”

Blue Flag growth

Brown said the company has about $700 million of equity under management for its current $1B portfolio. He said Blue Flag has about $500-700 million in dry powder that it will invest in in the next six to nine months, either investing in new high-barrier-to-entry markets or by adding properties in ones the company is already in.

We will continue to invest in those markets until we think we’ve acquired everything we want.

Jason Brown

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“We will continue to invest in those markets until we think we’ve acquired everything we want,” he said. “This is a little atypical than if we were just growing a brand or growing a management company and planting flags.”

Brown said he wouldn’t be surprised if Blue Flag moved across the ocean into Europe or the U.K. in similar markets in the coming years.

“I see us with a pretty substantial portfolio over the next three or five years in these ultra-luxury resort markets,” he said.

Managing the portfolio

Rubin said the best part of CMH’s partnership with Blue Flag is it allows the management company to create something from the beginning.

“Jason and I are very aligned. We’ve worked together a long time on culture, and I’m a big proponent of culture,” he said. “I always quote, ‘Culture eats strategy for breakfast’ from Peter Drucker, and a lot of that leads to all this ideation… then just the ability to align with your ownership group with the same vision and deliver on the promise.”

While Brown said Rubin is capable of doing it, CMH will stick to managing Blue Flag’s portfolio for now instead of adding third-party contracts.

Steve Rubin

“It is capped to the portfolio that we are feeding with our discretionary capital. It’s very akin back to the Kimpton days,” Brown said. “[CMH] will just manage our portfolio, and that’s going to be relatively sizable over the next couple of years… and [Rubin] is building out those capabilities so that we can operate in a really interesting, efficient manner.”

Brown said CMH will be capable of things bigger companies are doing, especially when factoring in the experience of guests and F&B.

“We have some of the best operators out there today working on Steve’s team and giving people a fantastic experience in places where, traditionally, you wouldn’t expect that level of hospitality, that level of design, that level of menu.”