Pictured on the home page: 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 location pictured is Cape Cod, MA.

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, 2017)

Agency RMBS Long Portfolio

Agency RMBS Long Portfolio

Agency RMBS Interest Rate Hedging Portfolio

Agency Interest Rate Hedging Portfolio

Agency Fixed Rate Long Portfolio — Collateral Characteristics

Agency Fixed Rate Long Portfolio

Non-Agency RMBS Long Portfolio

Non-Agency RMBS Long Portfolio

Financial Highlights

For the year ended December 31,
in thousands, except per share data 2017 2016 2015
Summary of Operations
Net interest income 30,143 24,224 34,515
Net realized and change in net unrealized gain (loss) on securities (7,175) (1,676) (9,327)
Net realized and change in net unrealized gain (loss) on financial derivatives (6,478) (5,633) (20,013)
Net income 10,788 11,906 30
Earnings per share 0.93 1.31
Core earnings per share 1.91 1.71 2.41
Cash dividends per share 1.57 1.65 2.00
As of December 31,
in thousands, except per share and ratio data 2017 2016
Balance Sheet Data
Cash and cash equivalents 56,117 33,504
Mortgage-backed securities, at fair value 1,685,998 1,226,994
Financial derivatives at fair value, net 6,929 4,033
Repurchase agreements (1,597,206) (1,197,973)
Total shareholders' equity 192,703 141,677
Book value per share 14.45 15.52
Common shares outstanding 13,340 9,131
Debt-to-equity ratio 8.3:1 8.5:1

Book Value Per Share


Yield Curve Flattened Dramatically in 2017

U.S. Treasury 2-year and 10-year Yields and Spread in 2017


Prepayments Relatively Stable in 2017 After a Turbulent 2016 and Ended 2017 Near a 2-Year Low

MBA Refinance Index (Application Volume)


Volatility Has Returned in 2018

Chicago Board Options Exchange Volatility Index (VIX) and Merrill Lynch Option Volatility Estimate Index (MOVE) Have Both Moved Higher Since the Start of 2018


Dear Fellow Shareholders

On behalf of the entire Ellington team, it is my pleasure to address you once again in our Annual Report to review 2017 performance briefly and share our outlook for 2018. This past year proved to be one of the least volatile years for interest rates on record, despite three Federal Reserve interest rate hikes, a new administration in Washington, significant geopolitical uncertainties, and the first pullback in quantitative easing in a decade. Long-term interest rates remained range-bound, while the yield curve consistently flattened each quarter throughout the year. Given the calmness of last year's markets, our defensive positioning somewhat muted our results in 2017, but should set us up well for 2018, which is shaping up to be a much more volatile environment. For 2017, our core earnings comfortably covered our dividends, and we generated a return on average equity of 6.2%. Based on our March 19, 2018 closing price, our current annualized dividend represents an attractive yield of 13.0%.

The Federal Reserve Building

EARN's dynamic hedging strategy is designed above all to protect book value and preserve capital. To better match the characteristics of our mortgage assets, we position our interest rate hedges along the entire yield curve, leaving us with less exposure to changes in the shape of the yield curve. Our hedges include substantial TBA short positions, which not only reduce the amount of hedge rebalancing needed when interest rates move sharply, but also leave us carrying a lower net mortgage exposure than our Agency mortgage REIT peers.

Despite the record low volatility and low prepayment expectations, we maintained our hedging discipline during 2017 because we recognize that volatility can return to the market at any time. We don't mind spending a little on portfolio insurance in complacent markets when it means that we can outperform in more hostile environments. Let's not forget that it was only a little over a year ago, during the fourth quarter of 2016, that we saw a sudden spike in interest rates following the presidential election. At that time, EARN was the only company in its peer group with a positive economic return for the quarter. Thus far this year, we have certainly seen volatility return to the markets, and we look forward to the trading opportunities that we believe will emerge as a result of this increased volatility.

Fannie Mae Corporate Headquarters

During the nearly five years since our initial public offering in May 2013, we have always strived to be patient stewards of shareholders' capital. In the second quarter of 2017, we completed our first follow-on equity offering, successfully raising about $45 million in new capital. While the offering was modestly dilutive to book value per share, this was more than outweighed by the beneficial effects of a larger capital base, which substantially reduced our annualized expense ratio, and should be significantly accretive to earnings. Shareholders gained a major boost to liquidity from the issuance, as we increased our tradable float by over 50%. Our increased float and market capitalization also triggered EARN's inclusion in the Russell 3000 Index, which should increase demand for our shares and serve as an important source of ongoing technical support.

Ellington Residential Mortgage REIT acquires residential mortgage-backed securities, which are securities backed by individual residences.

In 2017, we also established an at-the-market (ATM) program for our common shares, which we used opportunistically to raise an additional $14 million in equity, further increasing the liquidity of our shares and lowering our expense ratio. Our ATM program allows us to raise smaller increments of capital in a highly cost-effective manner when market conditions are favorable.

As we look back on 2017, the protracted period of unusual calm in the markets rewarded high risk-taking. As such, our interest rate hedging strategy—which is designed to protect us from market shocks —ended up dampening our performance. However, we believe that this hedging strategy positions us well for 2018. Later this year, the Federal Reserve is expected to accelerate its balance sheet tapering and substantially raise short-term interest rates, and many other central banks are expected to withdraw stimulus for the first time in a decade. This combination of factors could put significant upward pressure on both overall interest rates and Agency RMBS yield spreads.

Freddie Mac Corporate Headquarters

We see many reasons for caution, and indeed we have already witnessed rising bond yields and sharply higher equity volatility so far this year. Thanks to our flexible and resilient portfolio management style—including our disciplined and dynamic hedging strategy and the high liquidity of our portfolio—we believe that we are well-positioned to capitalize on the investment opportunities that should emerge in the new market dynamic. Finally, with our stock price at a significant discount to book value, we plan to supplement our earnings with book value accretion via share repurchases.

We view EARN as an "all-weather" REIT, able to thrive across diverse market environments, and generate attractive risk-adjusted returns for shareholders over the long term. The future path of interest rates is impacted by multiple factors, many of which are impossible to predict. Therefore, rather than having a singleminded 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. We look forward to the challenges of the year ahead and the opportunities we believe they will bring.

Thank you again for your continued support and confidence, and we look forward to a successful 2018.


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
Chairman of the Board, J.G. Wentworth

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

Christopher M. Smernoff
Chief Financial Officer

Daniel Margolis
General Counsel

JR Herlihy
Chief Operating Officer

Jason Frank
Corporate Counsel and Secretary

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 Wednesday, May 16,
2018, at 11:45 am Eastern Time at the
Hyatt Regency at 1800 East Putnam
Avenue, Old Greenwich, CT 06870.