The Peregrine Falcon, the swiftest of all birds of prey, utilizes the freedom and perspective of high-altitude flight and exceptionally acute eyesight to identify and apprehend its target. The city pictured is Encinitas, CA.

Our annual report features photos of government agencies whose policies have a significant impact on our investment process and the valuations of the assets we trade.

About Ellington Residential Mortgage REIT

Ellington Residential Mortgage REIT is a mortgage real estate investment trust that specializes in acquiring, investing in and managing residential mortgage- and real estate-related assets, with a primary focus on residential mortgage-backed securities for which the principal and interest payments are guaranteed by a U.S. government agency or a U.S. government-sponsored enterprise. Ellington Residential Mortgage REIT is externally managed and advised by Ellington Residential Mortgage Management LLC, an affiliate of Ellington Management Group, L.L.C.

Our Portfolio (as of December 31, 2016)

Agency RMBS Long Portfolio
Agency Interest Rate Hedging Portfolio
equivalentsAgency Fixed Rate Long Portfolio — Collateral Characteristics
Non-Agency RMBS Long Portfolio

Financial Highlights

For the year ended December 31,
in thousands, except per share data 2016 2015 2014
Summary of Operations
Net interest income $24,224 $34,515 $42,313
Net realized and change in net unrealized gain (loss) on securities (1,676) (9,327) 51,007
Net realized and change in net unrealized gain (loss) on financial derivatives (5,633) (20,013) (71,400)
Net income 11,906 30 16,168
Cash dividends paid/declared 15,053 18,286 20,118
Earnings per share $1.31 $— $1.77
Core earnings per share $1.71 $2.41 $3.04
Cash dividends per share $1.65 $2.00 $2.20
As of December 31,
in thousands, except per share data 2016 2015
Balance Sheet Data
Mortgage-backed securities, at fair value $1,226,994 $1,242,266
Cash and cash equivalents 33,504 40,166
Financial derivatives at fair value, net 4,033 (2,542)
Repurchase agreements (1,197,973) (1,222,719)
Total shareholders' equity 141,677 144,855
Book value per share $15.52 $15.86
Common shares outstanding 9,131 9,135
Debt-to-equity ratio 8.5:1 8.4:1

Dear Fellow Shareholders:

On behalf of the entire Ellington team, it is my pleasure to address you once again in our Annual Report to briefly review 2016 performance and share our outlook for 2017. We are pleased with the strong performance Ellington Residential achieved in 2016, particularly given the challenges presented by heightened interest rate volatility. For the full year, we achieved a compounded economic return of 8.7%, and our core earnings comfortably covered our dividends. Our annualized dividend currently represents a yield of 11.0% based on our March 17, 2017 closing price.

Our performance for the year was especially strong in comparison to other Agency mortgage REITs, which on average had a compounded economic return for the year of only 1.3%. Our outperformance was particularly notable in the fourth quarter, with our +1.4% economic return, while every other Agency mortgage REIT had a negative economic return, with a -5.7% economic return on average.

The Capitol Building

The Capitol Building

The volatility in interest rates was historic in 2016, with both the 10-year and 30-year U.S. Treasury yields plummeting to all-time record low levels in July, only to surge in the fourth quarter in one of the largest quarterly increases ever. In response, the Mortgage Bankers Association Refinance Index reached a multi-year high on July 8, 2016, only to decline by over 50% during the fourth quarter, and fall back to its lowest level since the financial crisis by year end.

The Federal Reserve Buildin

The Federal Reserve Building

Despite these dramatic gyrations in interest rates and prepayment rates, Ellington Residential adapted and thrived throughout the year. Our performance in 2016 is a testament to our model-driven asset selection and disciplined hedging strategy, as it was our careful portfolio construction that successfully shielded our portfolio despite 2016's headwinds. In the falling and ultimately ultra-low interest rate environment of the first nine months of the year, our specified pools showed remarkable resilience against prepayments. Then, in the surging rate environment of the last part of the year, our TBA hedges helped protect us against what was otherwise a bloodbath in Agency RMBS. Our willingness to use significant amounts of TBA short positions in our hedging strategy is one of our most effective tools, and was a major contributor to book value preservation in 2016. Notably, our use of TBA short positions differentiates us from most other Agency mortgage REITs; only a few others use TBAs at all as hedges, and those that do, have used them on a much smaller scale.

Our objective since our inception remains unchanged: to generate attractive, risk-adjusted returns by combining research-driven security selection with active trading and hedging, rather than by just taking a buy-and-hold approach. We seek to capture upside in good markets and control downside in difficult ones. In 2016, we clearly demonstrated that this objective is not merely a slogan, and we believe that we continue to be uniquely qualified to achieve this objective over market cycles.

Fannie Mae Corporate Headquarters

Fannie Mae Corporate Headquarters

The future path of interest rates is impacted by multiple factors, many of which are impossible to predict. Therefore, instead of having a single-minded view of what the future will hold, we try to construct and manage our portfolios to perform over a wide range of potential economic scenarios. In 2017, we will continue to execute our strategy in what could be an extended period of heightened interest rate volatility. The new administration's policies are likely to have a significant impact on government spending, housing, and the financial markets. Additionally, in the near term, we should start to see the Federal Reserve's footprint in the Agency RMBS market contract further, as slower prepayments reduce its principal reinvestments. The Federal Reserve could even discontinue its policy of reinvesting the billions of principal payments it receives each month, or perhaps even sell down its portfolio outright, either of which would carry great significance for the Agency RMBS market. Today's uncertainties make it essential to have an adaptable strategy in place. Fortunately, we do, and are poised and ready to adapt and capitalize on the market opportunities that often arise out of such uncertainty.

Freddie Mac Corporate Headquarters

Freddie Mac Corporate Headquarters

Some have said that Agency mortgage REITs cannot succeed — and in fact aren't even designed to succeed — when interest rates are rising and the yield curve is flattening. We vehemently disagree that this view applies to Ellington Residential. We believe that 2016 demonstrates our unique ability to succeed — and even thrive — in market environments where others might struggle.

Thank you again for your continued support and confidence, and we look forward to a successful 2017.


Laurence Penn
Chief Executive Officer and President


Trustees & Officers

Board of Trustees

Thomas F. Robards
Chairman of the Board of Trustees and
Principal of Robards & Co, LLC

Robert B. Allardice, III
Director, The Hartford Financial Services
Group, Inc.

Menes O. Chee
Senior Managing Director, Blackstone
Tactical Opportunities Group

David Miller
Senior Advisor, Blackstone Tactical
Opportunities Group

Ronald I. Simon, Ph.D.
Financial Consultant and Investor

Laurence Penn
Chief Executive Officer and President

Michael W. Vranos
Co-Chief Investment Officer and
Founder and Chief Executive Officer of
Ellington Management Group, L.L.C.


Laurence Penn
Chief Executive Officer and President

Michael W. Vranos
Co-Chief Investment Officer

Mark Tecotzky
Co-Chief Investment Officer

Lisa Mumford
Chief Financial Officer and Treasurer

Daniel Margolis
General Counsel

Christopher M. Smernoff

Jason Frank
Secretary and Corporate Counsel

Company Information

Corporate Headquarters

Ellington Residential Mortgage REIT
53 Forest Avenue
Old Greenwich, CT 06870

Independent Registered
Public Accounting Firm

PricewaterhouseCoopers LLP
300 Madison Avenue
New York, NY 10017

Corporate Counsel

Vinson & Elkins LLP
901 East Byrd Street
Suite 1500
Richmond, VA 23219

Stock Transfer Agent

American Stock Transfer & Trust
Company, LLC
6201 15th Avenue
Brooklyn, NY 11219

Annual Meeting of Shareholders

Ellington Residential Mortgage REIT’s
2017 Annual Meeting of Shareholders
will be held on Tuesday, May 16, 2017,
at 11:00 am Eastern Time at the Hyatt
Regency at 1800 East Putnam Avenue,
Old Greenwich, CT 06870.