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EXHIBIT 2

Audited Combined Financial Statements of
Granite Real Estate Investment Trust and
Granite REIT Inc.
For the year ended December 31, 2013

Granite REIT 2013 33

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

Management of Granite Real Estate Investment Trust and Granite REIT Inc. (collectively, the "Trust") is responsible for the preparation and presentation of the combined financial statements and all information included in the 2013 Annual Report. The combined financial statements were prepared by management in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and where appropriate, reflect estimates based on management's best judgement in the circumstances. Financial information as presented elsewhere in the 2013 Annual Report has been prepared by management to ensure consistency with information contained in the combined financial statements. The combined financial statements have been audited by independent auditors and reviewed by the Audit Committees and approved by both the Board of Trustees of Granite Real Estate Investment Trust and the Board of Directors of Granite REIT Inc.

Management is responsible for the development and maintenance of systems of internal accounting and administrative cost controls of high quality, within reasonable cost. Such systems are designed to provide reasonable assurance that the financial information is accurate, relevant and reliable and that the Trust's assets are appropriately accounted for and adequately safeguarded. Management has determined that, as at December 31, 2013 and based on the framework set forth in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission, internal control over financial reporting was effective. The Trust's Chief Executive Officer and Chief Financial Officer, in compliance with Section 302 of the U.S. Sarbanes-Oxley Act of 2002 ("SOX"), have provided a SOX-related certification in connection with the Trust's annual disclosure document in the U.S. (Form 40-F) to the U.S. Securities and Exchange Commission. In accordance with Multilateral Instrument 52-109, a similar certification has been provided to the Canadian Securities Administrators.

The Trust's Audit Committees are appointed by their respective Boards annually and are comprised solely of outside independent Directors or Trustees. The Audit Committees meet periodically with management, as well as with the independent auditors, to satisfy themselves that each is properly discharging its responsibilities to review the combined financial statements and the independent auditors' report and to discuss significant financial reporting issues and auditing matters. The Audit Committees report their findings to the Boards for consideration when approving the combined financial statements for issuance to the stapled unitholders.

The combined financial statements and the effectiveness of internal control over financial reporting have been audited by Deloitte LLP, the independent auditors, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States) on behalf of the stapled unitholders. The Auditors' Reports outline the nature of their examinations and their opinions on the combined financial statements of the Trust and the effectiveness of the Trust's internal control over financial reporting. The independent auditors have full and unrestricted access to the Audit Committees.

THOMAS HESLIP	MICHAEL FORSAYETH
Chief Executive Officer	Chief Financial Officer

Toronto, Canada,
March 5, 2014

34 Granite REIT 2013

INDEPENDENT AUDITORS' REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees and Unitholders of Granite Real Estate Investment Trust
and the Board of Directors and Shareholders of Granite REIT Inc.

We have audited the accompanying combined financial statements of Granite Real Estate Investment Trust and Granite REIT Inc. (collectively, the "Trust"), which comprise the combined balance sheets as at December 31, 2013, December 31, 2012, and January 1, 2012, and the combined statements of income, combined statements of comprehensive income, combined statements of unitholders' or shareholders' equity and combined statements of cash flows for the years ended December 31, 2013 and December 31, 2012, and the notes to the combined financial statements.

Management's Responsibility for the Combined Financial Statements

Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the combined financial statements present fairly, in all material respects, the financial position of the Trust as at December 31, 2013, December 31, 2012 and January 1, 2012 and its financial performance and its cash flows for the years ended December 31, 2013 and December 31, 2012 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Other Matter

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Trust's internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2014 expressed an unqualified opinion on the Trust's internal control over financial reporting.

Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants
March 5, 2014
Toronto, Canada

Granite REIT 2013 35

INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROLS UNDER
THE STANDARDS OF THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
(UNITED STATES)

To the Board of Trustees and Unitholders of Granite Real Estate Investment Trust
and the Board of Directors and Shareholders of Granite REIT Inc.

We have audited the internal control over financial reporting of Granite Real Estate Investment Trust and Granite REIT Inc. (collectively, the "Trust") as of December 31, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Trust's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Trust's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the combined financial statements of the Trust as of and for the year ended December 31, 2013 of the Trust and our report dated March 5, 2014 expressed an unqualified opinion on those financial statements.

Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants
March 5, 2014
Toronto, Canada

36 Granite REIT 2013

Combined Balance Sheets
(Canadian dollars in thousands)

As at	Note	December 31, 2013		December 31, 2012		January 1, 2012
				(Note 3)		(Note 3)
ASSETS
Non-current assets:
Investment properties	5	$	2,351,897	$	1,943,697	$	1,891,851
Deferred tax assets	12		8,173		—		—
Note receivable	6		—		—		2,543
Fixed assets, net			1,938		1,837		36
Other assets	7		1,958		320		427
			2,363,966		1,945,854		1,894,857
Current assets:
Current portion of notes receivable	6		—		2,612		5,339
Accounts receivable			2,491		3,662		6,557
Income taxes receivable	12		930		2,622		1,012
Prepaid expenses and other			1,366		745		645
Restricted cash	4		4,360		522		—
Cash and cash equivalents			95,520		51,073		56,908
Total assets		$	2,468,633	$	2,007,090	$	1,965,318
LIABILITIES AND STAPLED UNITHOLDERS' OR SHAREHOLDERS' EQUITY
Non-current liabilities:
Unsecured debentures, net	8	$	462,070	$	263,589	$	263,236
Cross Currency Interest Rate Swap	8		11,003		—		—
Secured long-term debt	9		41,856		—		—
Deferred tax liabilities	12		166,622		185,215		193,373
Contingent consideration	4		3,777		—		—
			685,328		448,804		456,609
Current liabilities:
Deferred revenue			5,194		4,494		2,519
Bank indebtedness	10		53,180		—		—
Accounts payable and accrued liabilities	11		33,178		25,955		13,957
Distributions payable	14		8,591		—		—
Income taxes payable	12		6,652		11,984		20,685
Total liabilities			792,123		491,237		493,770
Equity:
Stapled unitholders' or shareholders' equity			1,671,227		1,514,812		1,470,634
Non-controlling interests			5,283		1,041		914
Total equity			1,676,510		1,515,853		1,471,548
Total liabilities and stapled unitholders' or shareholders' equity		$	2,468,633	$	2,007,090	$	1,965,318
Commitments and contingencies (note 23)
See accompanying notes

On behalf of the Boards:
/s/  G. WESLEY VOORHEIS           Director/Trustee	/s/  GERALD J. MILLER            Director/Trustee

Granite REIT 2013 37

Combined Statements of Income
(Canadian dollars in thousands, except per unit/share figures)

Years ended December 31,		Note		2013			2012
							(Note 3)
Revenues
Rental revenue and tenant recoveries				$	203,247		$	181,115
Operating costs and expenses (income)
Property operating costs
	Non-recoverable from tenants	15	(a)		4,427			5,582
	Recoverable from tenants	15	(a)		1,147			—
General and administrative		15	(b)		27,313			31,011
Depreciation and amortization					454			244
Interest expense and other financing costs, net		15	(c)		20,585			15,871
Foreign exchange losses (gains), net					13			(186	)
Income before fair value changes, acquisition transaction costs, gain on Meadows holdback, loss on sale of investment properties and income taxes					149,308			128,593
Fair value gains (losses) on investment properties, net		5			(25,224	)		33,343
Fair value gains (losses) on financial instruments		15	(d)		72			(359	)
Acquisition transaction costs		4	(c)		(14,246	)		—
Gain on Meadows holdback		6			5,143			—
Loss on sale of investment properties		5			(1,122	)		(21	)
Income before income taxes					113,931			161,556
Income tax expense (recovery)		12			(31,335	)		11,729
Net income				$	145,266		$	149,827
Net income attributable to:
Stapled unitholders or common shareholders				$	145,031		$	149,756
Non-controlling interests					235			71
				$	145,266		$	149,827
Net income per unit or share attributable to stapled unitholders
Basic and diluted		17		$	3.09		$	3.20

See accompanying notes

38 Granite REIT 2013

Combined Statements of Comprehensive Income
(Canadian dollars in thousands)

Years ended December 31,		Note		2013			2012
							(Note 3)
Net income				$	145,266		$	149,827
Other comprehensive income (loss):
	Foreign currency translation adjustment				126,527			(10,728	)
	Unrealized loss on Cross Currency Interest Rate Swap	8	(c)		(11,490	)		—
	Net foreign exchange loss on net investment hedge, includes income taxes of $0.2 million (2012 — nil)				(6,992	)		—
Total other comprehensive income (loss)					108,045			(10,728	)
Comprehensive income				$	253,311		$	139,099
Comprehensive income attributable to:
	Stapled unitholders or common shareholders			$	252,876		$	138,972
	Non-controlling interests				435			127
Comprehensive income				$	253,311		$	139,099

See accompanying notes

Granite REIT 2013 39

Combined Statements of Unitholders' or Shareholders' Equity
(Canadian dollars in thousands)

Year Ended December 31, 2013	Number of Units	Stapled Unitholders' equity		Contributed surplus			Deficit			Accumulated other comprehensive income (loss)			Total			Non- controlling interests			Total
Equity at January 1, 2013	46,833	$	2,117,256	$	63,168		$	(654,828	)	$	(10,784	)	$	1,514,812		$	1,041		$	1,515,853
Net income	—		—		—			145,031			—			145,031			235			145,266
Other comprehensive income	—		—		—			—			107,845			107,845			200			108,045
Distributions	—		—		—			(98,922	)		—			(98,922	)		(215	)		(99,137	)
Non-controlling interests recognized	—		—		—			—			—			—			4,022			4,022
Units issued on exercise of stapled unit options	105		3,892		—			—			—			3,892			—			3,892
Units issued on settlement of deferred stapled units	7		264		—			—			—			264			—			264
Reclassification of unit-based awards	—		—		(1,743	)		48			—			(1,695	)		—			(1,695	)
Equity at December 31, 2013	46,945	$	2,121,412	$	61,425		$	(608,671	)	$	97,061		$	1,671,227		$	5,283		$	1,676,510

Year Ended December 31, 2012	Number of Shares		Shareholders' equity			Contributed surplus			Deficit			Accumulated other comprehensive loss			Total			Non- controlling interests		Total
Equity at January 1, 2012	46,871		$	2,119,515		$	62,215		$	(711,096	)	$	—		$	1,470,634		$	914	$	1,471,548
Net income	—			—			—			149,756			—			149,756			71		149,827
Other comprehensive income (loss)	—			—			—			—			(10,784	)		(10,784	)		56		(10,728	)
Dividends	—			—			—			(93,488	)		—			(93,488	)		—		(93,488	)
Common shares issued on exercise of stock options	30			1,143			(187	)		—			—			956			—		956
Common shares issued on settlement of share units	15			350			(350	)		—			—			—			—		—
Stock-based compensation	—			—			432			—			—			432			—		432
Repurchase of common shares for cancellation	(83	)		(3,752	)		1,058			—			—			(2,694	)		—		(2,694	)
Equity at December 31, 2012	46,833		$	2,117,256		$	63,168		$	(654,828	)	$	(10,784	)	$	1,514,812		$	1,041	$	1,515,853

See accompanying notes

40 Granite REIT 2013

Combined Statements of Cash Flows
(Canadian dollars in thousands)

Years ended December 31,		Note		2013			2012
							(Note 3)
OPERATING ACTIVITIES
Net income				$	145,266		$	149,827
Items not involving current cash flows		18	(a)		(16,516	)		(34,754	)
Current income tax expense					10,490			18,652
Income taxes paid					(14,525	)		(28,635	)
Interest expense					19,945			16,342
Interest paid					(17,059	)		(16,146	)
Changes in working capital balances		18	(b)		293			10,751
Cash provided by operating activities					127,894			116,037
INVESTING ACTIVITIES
Investment properties:
	Business acquisitions (net of cash acquired of $375)	4			(233,363	)		—
	Acquisition of development lands	4			(14,204	)		—
	Capital expenditures				(28,853	)		(29,808	)
	Proceeds on disposal, net	5			16,843			1,221
Fixed asset additions					(673	)		(1,841	)
Proceeds from notes receivable		6			7,870			4,973
(Increase) decrease in other assets					(1,209	)		154
Cash used in investing activities					(253,589	)		(25,301	)
FINANCING ACTIVITIES
Distributions or dividends paid					(90,331	)		(93,822	)
Proceeds from units or shares issued					3,116			956
Proceeds from unsecured debentures issued					200,000			—
Proceeds from bank indebtedness					129,095			42,000
Repayments of bank indebtedness					(78,692	)		(42,000	)
Financing costs paid					(2,765	)		(410	)
Contributions from non-controlling interests					1,921			—
Distributions to non-controlling interests					(215	)		—
Repurchase of common shares					—			(2,694	)
Cash provided by (used in) financing activities					162,129			(95,970	)
Effect of exchange rate changes on cash and cash equivalents					8,013			(601	)
Net increase (decrease) in cash and cash equivalents during the year					44,447			(5,835	)
Cash and cash equivalents, beginning of year					51,073			56,908
Cash and cash equivalents, end of year				$	95,520		$	51,073

See accompanying notes

Granite REIT 2013 41

Notes to Combined Financial Statements
(All amounts in Canadian dollars and all tabular amounts in thousands unless otherwise noted)

1.  NATURE AND DESCRIPTION OF THE TRUST

Effective January 3, 2013, Granite Real Estate Inc. ("Granite Co.") completed its conversion from a corporate structure to a stapled unit real estate investment trust ("REIT") structure. The conversion to a REIT was implemented pursuant to a court approved plan of arrangement (the "Arrangement") under the Business Corporations Act (Quebec). Through a series of steps and reorganizations Granite Real Estate Investment Trust ("Granite REIT") and Granite REIT Inc. ("Granite GP"), in addition to other entities, were formed. Granite REIT is an unincorporated, open ended, limited purpose trust established under and governed by the laws of the province of Ontario and created pursuant to a Declaration of Trust dated September 28, 2012 and recently amended on January 3, 2013. Granite GP was incorporated on September 28, 2012 under the Business Corporations Act (British Columbia).

Under the Arrangement, all of the common shares of Granite Co. were exchanged, on a one-for-one basis, for stapled units, each of which consists of one unit of Granite REIT and one common share of Granite GP. Granite REIT, Granite GP and their subsidiaries (together "Granite" or the "Trust") are carrying on the business previously conducted by Granite Co. The assets, liabilities and operations of the new combined stapled unit structure comprise all the assets, liabilities and operations of Granite Co. (note 2(c)). The stapled units trade on the Toronto Stock Exchange ("TSX") and on the New York Stock Exchange ("NYSE"). The principal office of Granite REIT is 77 King Street West, Suite 4010, P.O. Box 159, Toronto-Dominion Centre, Toronto, Ontario, M5K 1H1, Canada. The registered office of Granite GP is Suite 2600, Three Bentall Centre, 595 Burrard Street P.O. Box 49314, Vancouver, British Columbia, V7X 1L3, Canada.

The Trust is a Canadian-based REIT engaged in the ownership and management of predominantly industrial, warehouse and logistics properties in North America and Europe. The Trust owns approximately 32.0 million square feet in over 100 rental income properties. The Trust's tenant base currently includes Magna International Inc. and its operating subsidiaries (together "Magna") as its largest tenants, together with tenants from other industries.

These combined financial statements were approved by the Board of Trustees of Granite REIT and Board of Directors of Granite GP on March 5, 2014.

2.  SIGNIFICANT ACCOUNTING POLICIES

The accounting policies described below have been applied consistently to all periods presented in these combined financial statements and in preparing the opening International Financial Reporting Standards ("IFRS") balance sheet as at January 1, 2012 for the purposes of the transition to IFRS. Standards and guidelines not effective for the current period are described in note 2(o) below.

These combined financial statements contain disclosures that explain accounting policy differences between IFRS and United States generally accepted accounting principles ("U.S. GAAP") that are significant to the understanding of the changes in financial position and performance of the Trust since the annual financial statements for the year ended December 31, 2012, which were prepared in accordance with U.S. GAAP.

(a)

Statement of Compliance

The combined financial statements represent the first annual financial statements of the Trust prepared in accordance with IFRS as issued by the International Accounting Standards Board. The Trust adopted IFRS in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards ("IFRS 1"). The Trust's date of transition to IFRS is January 1, 2012. Further information on the impact of the transition to IFRS is provided in note 3.

42 Granite REIT 2013

(b)

Combined Financial Statements and Basis of Consolidation

As a result of the REIT conversion and the steps and reorganizations described in note 1, the Trust does not have a single parent; however, each unit of Granite REIT and each share of Granite GP trade as a single stapled unit and accordingly, Granite REIT and Granite GP have identical ownership. Therefore, these financial statements have been prepared on a combined basis whereby the assets, liabilities and results of Granite GP and Granite REIT have been combined. The combined financial statements include the subsidiaries of Granite GP and Granite REIT. Subsidiaries are fully consolidated by Granite GP or Granite REIT from the date of acquisition, being the date on which control is obtained. The subsidiaries continue to be consolidated until the date that such control ceases. Control exists when Granite GP or Granite REIT have power, exposure, or rights to variable returns and the ability to use their power over the entity to affect the amount of returns it generates. Prior to the REIT conversion, Granite Co. prepared consolidated financial statements. Accordingly, the consolidated financial statements of Granite Co., as previously reported, are presented as the comparative financial statements for the dates and periods prior to January 3, 2013.

All intercompany balances, income and expenses and unrealized gains and losses resulting from intercompany transactions are eliminated.

(c)

Common Control Transactions

IFRS does not include specific measurement guidance for transfers of businesses or subsidiaries between entities under common control. However, based on accounting pronouncements and the IFRS framework, the Trust has elected to account for such transactions at predecessor carrying values used in prior reporting periods (note 1).

(d)

Investment Properties

The Trust accounts for its investment properties, which include income-producing properties, properties under development and land held for development, in accordance with IAS 40 Investment Property ("IAS 40"). For acquired investment properties that meet the definition of a business, the acquisition is accounted for as a business combination; otherwise they are initially measured at cost including directly attributable expenses. Subsequent to acquisition, investment properties are carried at fair value, which is determined based on available market evidence at the balance sheet date including, among other things, rental revenue from current leases and reasonable and supportable assumptions that represent what knowledgeable, willing parties would assume about rental revenue from future leases less future cash outflows in respect of capital expenditures. Gains and losses arising from changes in fair value are recognized in net income in the period of change.

Income-Producing Properties

In order to avoid double counting, the carrying value of income-producing properties includes the impact of straight-line rental revenue (note 2(j)), tenant inducements and deferred leasing costs since these amounts are incorporated in the determination of the fair value of income-producing properties.

When an income-producing property is disposed of, the gain or loss is determined as the difference between the disposal proceeds, net of selling costs and the carrying amount of the property and is recognized in net income in the period of disposal.

Properties Under Development

The Trust's development properties are classified as such until the property is substantially completed and available for occupancy. The Trust capitalizes acquisition, development and expansion costs, including direct construction costs, borrowing costs and indirect costs wholly attributable to development. Borrowing costs are capitalized to projects under development or construction based on the average accumulated expenditures outstanding during the period multiplied by the Trust's average borrowing rate on existing debt. Where borrowings are associated with specific developments, the

Granite REIT 2013 43

amount capitalized is the gross borrowing cost incurred on such borrowings less any investment income arising on temporary investment of these borrowings. The capitalization of borrowing costs is suspended if there are prolonged periods that development activity is interrupted. The Trust capitalizes direct and indirect costs, including real estate taxes and insurance of the development property if activities necessary to ready the development property for its intended use are in progress. Costs of internal personnel and other indirect costs that are not wholly attributable to a project are expensed as incurred.

Properties under development are measured at fair value as stated above, however, where fair value is not reliably determinable, the property is measured at cost until the earlier of the date construction is completed and the date at which fair value becomes reliably determinable.

(e)

Business Combinations

The Trust accounts for investment property acquisitions as a business combination if the particular assets and set of activities acquired can be operated and managed as a business in its current state for the purpose of providing a return to the unitholders. The Trust applies the acquisition method to account for business combinations. The consideration transferred for a business combination is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Trust. The total consideration includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired as well as liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.

The Trust recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognized amounts of the acquiree's identifiable net assets.

Acquisition related costs are expensed as incurred.

Any contingent consideration is recognized at fair value at the acquisition date. Subsequent changes to the fair value of contingent consideration that is recorded as an asset or liability is recognized in accordance with IAS 39, Financial Instruments: Recognition and Measurement ("IAS 39") primarily in net income or, in certain circumstances, as a change to other comprehensive income. Contingent consideration that is recorded as equity is not re-measured, and its subsequent settlement is accounted for within equity.

Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling interest over the identifiable net assets acquired. If the consideration is lower than the fair value of the net assets acquired, the difference is recognized in net income.

(f)

Foreign Currency Translation

The assets and liabilities of the Trust's foreign operations are translated into Canadian dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case, for material transactions, the exchange rates at the dates of those transactions are used. Exchange differences arising are recognized in other comprehensive income and accumulated in equity.

In preparing the financial statements of each entity, transactions in currencies other than the entity's functional currency (foreign currencies) are recognized at the average rates of exchange prevailing in the period. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency

44 Granite REIT 2013

are not retranslated. Exchange differences on monetary items are recognized in net income in the period in which they arise except for:

•

The effective portion of exchange differences on transactions entered into in order to hedge certain foreign currency risks; and



•

Exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation) are recognized in other comprehensive income.

(g)

Financial Instruments and Hedging

Financial assets

The Trust classifies its financial assets upon initial recognition as fair value through profit or loss ("FVTPL"), held to maturity, loans and receivables or available for sale.

Loans and receivables, which include notes receivable, accounts receivable, cash and cash equivalents, restricted cash and certain other assets, are initially measured at fair value and are subsequently measured at amortized cost less provision for impairment. A provision for impairment is recognized when there is objective evidence that collection may not be possible under the original terms of the contract. Indicators of impairment include default on payments and significant financial difficulty of the tenant or counterparty. The carrying amount of the asset is reduced through a provision account, and the amount of the loss is recognized in net income within operating expenses. Bad debt write-offs occur when the Trust determines collection is unlikely. Any subsequent recoveries of amounts previously written off are credited against general and administrative expenses in net income. Accounts receivable that are more than one month past due are not considered impaired unless there is evidence that collection is not possible.

The Trust does not currently have any financial assets classified as held to maturity or available for sale.

Financial liabilities

The Trust classifies its financial liabilities upon initial recognition as FVTPL or other financial liabilities. Other financial liabilities, which include unsecured debentures, secured long-term debt, bank indebtedness, accounts payable and accrued liabilities and distributions payable, are measured at amortized cost. The Trust's policy for the treatment of financing costs related to the issuance of long term debt is to present debt instruments on the balance sheets net of the related financing costs, with the net balance accreting to the face value of the debt over its term following the effective interest method. The costs of obtaining a revolving credit facility are capitalized and amortized over the term of the facility on a straight-line basis.

Derivatives and Hedging

Derivative instruments are recorded in the combined balance sheet at fair value including those derivatives that are embedded in financial or non-financial contracts. Changes in the fair value of derivative instruments which are not designated as hedges for accounting purposes are recognized in the statement of income. The Trust utilizes derivative financial instruments from time to time in the management of its foreign currency and interest rate exposures. The Trust's policy is not to utilize derivative financial instruments for trading or speculative purposes.

The Trust applies hedge accounting to certain derivative and non-derivative financial instruments designated as hedges of net investments in subsidiaries with a functional currency other than the Canadian dollar. Hedge accounting is discontinued prospectively when the hedge relationship is terminated or no longer qualifies as a hedge, or when the hedging item is sold or terminated. In a net investment hedging relationship, the effective portion of foreign exchange gains or losses on the hedging instruments is recognized in other comprehensive income and the ineffective portion is recognized in net

Granite REIT 2013 45

income. The amounts recorded in accumulated other comprehensive income are recognized in net income when there is a disposition or partial disposition of the foreign subsidiary.

(h)

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash on account, demand deposits and short-term investments with maturities of less than three months at the date of acquisition.

Restricted cash represents segregated cash accounts for a specific purpose and cannot be used for general corporate purposes.

(i)

Fixed Assets

Fixed assets are recorded at cost less accumulated depreciation. Depreciation expense is recorded on a straight-line basis over the estimated useful lives of the fixed assets, which typically range from 3 to 5 years for computer hardware and software and 5 to 7 years for other furniture and fixtures. Leasehold improvements are amortized over the term of the applicable lease.

(j)

Revenue Recognition

Where Granite has retained substantially all the benefits and risks of ownership of its rental properties, leases with its tenants are accounted for as operating leases. Where substantially all the benefits and risks of ownership of the Trust's rental properties have been transferred to its tenants, the Trust's leases are accounted for as finance leases. For leases involving land and buildings, the Trust evaluates the land and building separately in determining the appropriate lease treatment, unless the fair value of the land at the inception of the lease is considered to be immaterial. All of the Trust's current leases (the "Leases") are operating leases.

The majority of the Leases are net leases under which the lessee is responsible for the direct payment of all operating costs related to the properties, including property taxes, insurance, utilities and non-structural repairs and maintenance. Revenues and operating expenses for these Leases do not include any amounts related to operating costs paid directly by such lessees. The remaining Leases generate rental revenue that includes the recovery of operating costs.

The Leases may provide for either scheduled fixed rent increases or periodic rent increases based on increases in a local price index. Where periodic rent increases depend on increases in a local price index, such rent increases are accounted for as contingent rentals and recognized in income in applicable future years. Where scheduled fixed rent increases exist in operating leases, the total scheduled fixed lease payments of the lease are recognized in income evenly on a straight-line basis over the term of the lease.

(k)

Unit-Based Compensation Plans

Incentive Stock Option Plan

Compensation expense for option grants is based on the fair value of the options at the grant date and is recognized over the period from the grant date to the date the award is vested. Prior to the REIT conversion, compensation expense for stock option grants was recognized as general and administrative expenses, with a corresponding amount included in equity as contributed surplus. The contributed surplus balance was reduced as options were exercised and the amount initially recorded for the options in contributed surplus was credited to common shares, along with the proceeds received on exercise. On conversion to a REIT, a liability was recognized for outstanding options based upon the fair value as the Trust is an open ended trust making its units redeemable and therefore effectively cash settled. During the period in which options are outstanding, the liability is adjusted for changes in the fair value with such adjustments being recognized as compensation expense in general and administrative expenses in the period in which they occur. The liability balance is reduced as options are exercised and recorded in equity as stapled units along with the proceeds received on exercise.

46 Granite REIT 2013

Executive Deferred Stapled Unit Plan

The executive deferred stapled unit plan is measured at fair value at the date of grant and amortized to compensation expense from the effective date of the grant to the final vesting date. Compensation expense is recognized on a proportionate basis consistent with the vesting features of each tranche of the grant. Prior to the REIT conversion, compensation expense for the executive deferred share unit plan was recognized in general and administrative expenses with a corresponding amount included in equity as contributed surplus. The contributed surplus balance was reduced and credited to common shares as shares were issued under the plan. On conversion to a REIT, compensation expense for deferred stapled units granted under the plan continues to be recognized as general and administrative expenses with a corresponding liability recognized based on the fair value of the Trust's stapled units as the Trust is an open ended trust making its units redeemable and therefore effectively cash settled. During the period in which the deferred stapled units are outstanding, the liability is adjusted for changes in the market value of the Trust's stapled unit, with such adjustments being recognized as compensation expense in general and administrative expenses in the period in which they occur. The liability balance is reduced as deferred stapled units are settled for stapled units and recorded in equity.

Director/Trustee Deferred Share Unit Plan

The compensation expense and a corresponding liability associated with the director/trustee deferred share unit plan is measured based on the market value of the underlying stapled units (or previously common shares). During the period in which the awards are outstanding, the liability is adjusted for changes in the market value of the underlying stapled unit, with such positive or negative adjustments being recognized in general and administrative expenses in the period in which they occur.

(l)

Income Taxes

Operations in Canada

Upon completion of the Arrangement, Granite qualified as a mutual fund trust under the Income Tax Act (Canada) (the "Act") and as such the Trust itself will not be subject to income taxes provided it continues to qualify as a REIT for purposes of the Act. A REIT is not taxable and not considered to be a Specified Investment Flow-through Trust provided it complies with certain tests and it distributes all of its taxable income in a taxation year to its unitholders.

The Trust's qualification as a REIT results in no current or deferred income tax being recognized in the combined financial statements for income taxes related to the Canadian investment properties. Further, as a result of converting to a REIT, certain deferred income taxes reported prior to January 3, 2013 were reversed through deferred income tax expense. Current income tax related to certain taxable Canadian entities will be determined on the basis of enacted or substantively enacted tax rates and laws at each balance sheet date.

Operations in the United States

The Trust's investment property operations in the United States are conducted in a qualifying United States REIT ("US REIT") for purposes of the Internal Revenue Code of 1986, as amended. As a qualifying US REIT, it is not taxable provided it complies with certain tests in addition to the requirement to distribute substantially all of its taxable income.

As a qualifying US REIT, current income taxes on U.S. taxable income have not been recorded in the combined financial statements. However, the Trust has recorded deferred income taxes that may arise on the disposition of its investment properties as the Trust will likely be subject to entity level income tax in connection with such transactions pursuant to the Foreign Investment in Real Property Tax Act.

Granite REIT 2013 47

Operations in Europe and Mexico

The Trust consolidates certain entities that continue to be subject to income tax. Income taxes for these taxable entities are recorded as follows:

Current Income Tax

The current income tax expense is determined on the basis of enacted or substantively enacted tax rates and laws at each balance sheet date.

Deferred Income Tax

Deferred income tax is recorded, using the liability method, on temporary differences arising between the tax basis of assets and liabilities and the amounts reported in the combined financial statements. Deferred income tax is measured using tax rates and laws that are enacted and substantively enacted as at each balance sheet date and are expected to apply when the temporary differences are expected to reverse. Deferred income tax assets are recognized only to the extent that it is probable that sufficient future taxable profit will be available against which the deductible temporary difference can be utilized.

Each of current and deferred tax assets and liabilities are offset when they are levied by the same taxation authorities on either the same taxable entities, or different taxable entities with the same reporting group that settle on a net basis, and when there is a legal right to offset.

(m)

Trust Units

The stapled units are redeemable at the option of the holder and therefore are required to be accounted for as financial liabilities, except where certain exemption conditions are met, in which case redeemable instruments may be classified as equity. The attributes of the stapled units meet the exemption conditions set out in IAS 32, Financial Instruments: Presentation ("IAS 32") and are therefore presented as equity for purposes of that standard.

(n)

Significant Accounting Judgments, Estimates and Assumptions

The preparation of these combined financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the combined financial statements, and the reported amounts of revenue and expenses during the reporting periods.

Management believes that the judgments, estimates and assumptions utilized in preparing the combined financial statements are reasonable and prudent; however, actual results could be materially different and require an adjustment to the reported results.

Judgments

The following are the critical judgments that have been made in applying the Trust's accounting policies and that have the most significant effect on the amounts recognized in the combined financial statements:

        Leases

The Trust's policy for revenue recognition is described in note 2(j). The Trust makes judgments in determining whether certain leases are operating or finance leases, in particular tenant leases with long contractual terms or leases where the property is a large square-footage and/or architecturally unique and long-term ground leases where the Trust is the lessee.

        Investment properties

The Trust's policy relating to investment properties is described in note 2(d). In applying this policy, judgment is applied in determining whether certain costs incurred for tenant improvements are

48 Granite REIT 2013

additions to the carrying amount of the property or represent incentives, identifying the point at which practical completion of properties under development occurs and determining borrowing costs to be capitalized to the carrying value of properties under development. Judgment is also applied in determining the extent and frequency of independent appraisals.

        Income taxes

The Trust applies judgment in determining whether it will continue to qualify as a REIT for both Canadian and U.S. tax purposes for the foreseeable future. However, should it, at some point no longer qualify, it would be subject to income tax and would be required to recognize current and deferred income taxes.

Estimates and Assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year include the following:

        Valuation of investment properties

The fair value of investment properties is determined by management using primarily the discounted cash flow method in which the income and expenses are projected over the anticipated term of the investment plus a terminal value discounted using an appropriate discount rate. Management also takes into consideration appraisals obtained from time to time from independent qualified real estate valuation experts in order to arrive at its own conclusions on value. The Trust's critical assumptions relating to the estimates of fair values of investment properties include the receipt of contractual rents, contractual renewal terms, expected future market rental rates, discount rates that reflect current market uncertainties, capitalization rates and recent property investment prices. If there is any change in these assumptions or regional, national or international economic conditions, the fair value of investment properties may change materially. Refer to note 5 for further information on the estimates and assumptions made by management.

        Fair value of financial instruments

Where the fair value of financial assets or liabilities recorded on the balance sheet or disclosed in the notes cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flow method. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as credit risk and volatility. Changes in assumptions about these factors could materially affect the reported fair value of financial instruments.

        Income taxes

The Trust operates in a number of countries and is subject to the income tax laws in its operating jurisdictions. These laws can be subject to different interpretations and changes by relevant taxation authorities. Significant judgment is required in the estimation of Granite's income tax expense, interpretation and application of the relevant tax laws, and provision for any exposure that may arise from tax positions that are under audit by relevant taxation authorities.

The recognition and measurement of deferred tax assets or liabilities is dependent on management's estimate of future taxable profits and income tax rates that are expected to be in effect in the period the asset is realized or the liability is settled. Any changes in management's estimate can result in changes in deferred tax assets or liabilities as reported in the combined balance sheets and also the deferred income tax expense in the combined statements of income.

Granite REIT 2013 49

(o)

Future Accounting Policy Changes

The following accounting standards have been issued but are not yet effective:

There are a number of amendments to IAS 32 Financial Instruments: Presentation ("IAS 32"), relating to offsetting certain assets and liabilities. These amendments are to the application guidance in IAS 32 and clarify some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. The amendments are effective January 1, 2014. The Trust does not expect the adoption of these amendments to have a significant impact on its combined financial statements.

In May 2013, IFRIC Interpretation 21 — Levies ("IFRIC 21") was issued which is an interpretation of IAS 37 — Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 clarifies what the obligating event is that gives rise to a levy and when a liability should be recognized. IFRIC 21 is effective for years beginning on or after January 1, 2014 and must be applied retrospectively. Realty taxes payable by the Trust are considered levies and the Trust is currently assessing the potential impact of this standard on its combined financial statements.

IFRS 9 Financial Instruments ("IFRS 9") will eventually replace IAS 39 Financial Instruments: Recognition and Measurement ("IAS 39") in its entirety. IFRS 9 addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The most significant change is, in cases where the fair value option is taken for financial liabilities, that the part of a fair value change due to an entity's own credit risk is recorded in other comprehensive income rather than the income statement. The effective date for implementation of this standard has not been determined. The Trust has not yet determined the impact of IFRS 9 on its combined financial statements.

3.  TRANSITION TO IFRS

Reconciliation of Equity as Reported Under U.S. GAAP and IFRS

The Trust has adopted IFRS as its basis of financial reporting effective for the year ended December 31, 2013. An opening IFRS balance sheet has been presented using a transition date of January 1, 2012 and comparative figures have also been conformed to comply with IFRS. Prior to the adoption of IFRS, the Trust prepared its financial statements in accordance with U.S. GAAP.

(a)

Elected exemption from full retrospective application

In preparing these combined financial statements in accordance with IFRS 1, the Trust has applied certain optional exemptions from full retrospective application of IFRS. The optional exemptions applied are described below:

i)

Business combinations

The Trust has applied the business combinations exemption in IFRS 1 to not apply IFRS 3, Business Combinations retrospectively to past business combinations completed prior to January 1, 2012.

ii)

Cumulative foreign currency translation differences

The Trust has elected to set the accumulated foreign currency translation account under U.S. GAAP, which is included in accumulated other comprehensive loss at December 31, 2011, to zero at January 1, 2012.

50 Granite REIT 2013

(b)

Mandatory exceptions to retrospective application

In preparing these combined financial statements in accordance with IFRS 1 the Trust has applied the mandatory exception from full retrospective application under IFRS relating to estimates. Hindsight was not used to create or revise estimates and accordingly the estimates previously made by the Trust under U.S. GAAP are consistent with their application under IFRS. None of the other mandatory exceptions apply to the Trust.

The following is a reconciliation of the Trust's balance sheet reported in accordance with U.S. GAAP to IFRS at January 1, 2012:

	Note		December 31, 2011 U.S. GAAP		Effect of transition to IFRS			January 1, 2012 IFRS
ASSETS
Non-current assets:
Real estate properties, net/Investment properties	(i	)	$	1,154,780	$	737,071		$	1,891,851
Deferred rent receivable	(ii	)		12,704		(12,704	)		—
Deferred tax assets	(iii	)		1,292		(1,292	)		—
Other non-current assets	(ii	)		6,177		(3,171	)		3,006
				1,174,953		719,904			1,894,857
Current assets:
Other current assets				13,553		—			13,553
Cash and cash equivalents				56,908		—			56,908
Total assets			$	1,245,414	$	719,904		$	1,965,318
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-current liabilities:
Unsecured debentures, net			$	263,236	$	—		$	263,236
Deferred tax liabilities	(iii	)		30,224		163,149			193,373
Deferred revenue	(ii	)		3,989		(3,989	)		—
				297,449		159,160			456,609
Current liabilities:
Deferred revenue	(ii	)		3,599		(1,080	)		2,519
Other current liabilities	(v	)		35,126		(484	)		34,642
Total liabilities				336,174		157,596			493,770
Shareholders' equity	(iv	)		909,240		561,394			1,470,634
Non-controlling interests	(v	)		—		914			914
Total liabilities and shareholders' equity			$	1,245,414	$	719,904		$	1,965,318

Granite REIT 2013 51

The following is a reconciliation of the Trust's balance sheet reported in accordance with U.S. GAAP to IFRS at December 31, 2012:

	Note	U.S. GAAP		Effect of transition to IFRS			IFRS
ASSETS
Non-current assets:
Real estate properties, net/Investment properties	(i)	$	1,136,158	$	807,539		$	1,943,697
Deferred rent receivable	(ii)		11,518		(11,518	)		—
Deferred tax assets	(iii)		3,924		(3,924	)		—
Other non-current assets	(ii)		5,369		(3,212	)		2,157
			1,156,969		788,885			1,945,854
Current assets:
Other current assets			10,163		—			10,163
Cash and cash equivalents			51,073		—			51,073
Total assets		$	1,218,205	$	788,885		$	2,007,090
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-current liabilities:
Unsecured debentures, net		$	263,589	$	—		$	263,589
Deferred tax liabilities	(iii)		27,626		157,589			185,215
Deferred revenue	(ii)		4,782		(4,782	)		—
			295,997		152,807			448,804
Current liabilities:
Deferred revenue	(ii)		5,839		(1,345	)		4,494
Other current liabilities	(iii),(v)		39,368		(1,429	)		37,939
Total liabilities			341,204		150,033			491,237
Shareholders' equity	(iv)		877,001		637,811			1,514,812
Non-controlling interests	(v)		—		1,041			1,041
Total liabilities and shareholders' equity		$	1,218,205	$	788,885		$	2,007,090

(i)

Investment properties

The Trust considers its income-producing properties and properties under development to be investment properties under IAS 40. The Trust has elected to use the fair value model for the valuation of its investment properties. The adjustment represents the cumulative unrealized gain in respect of the fair value of the Trust's investment properties, net of related intangible assets and liabilities which are inherently reflected in the fair value of investment properties and the reclassification of straight-line rental revenue (deferred rent receivable) to investment properties.

(ii)

Deferred rent receivable, other assets and certain deferred revenue

This adjustment represents the reclassification to investment properties of deferred rent receivable, other assets and certain deferred revenue relating to upfront lease payments not reflected in the discounted cash flow analysis to determine fair value for an investment property.

52 Granite REIT 2013

(iii)

Current and deferred income taxes

Current income tax payable decreased by $0.9 million at December 31, 2012 due to the measurement of current taxes using enacted and substantively enacted rates and legislation as at each balance sheet date as required under IFRS.

Under IFRS, deferred income taxes are recorded for temporary differences arising in respect of assets and liabilities at the tax rates that are expected to apply to the period when the asset is realized or the liability settled, based on tax rates and laws that have been enacted or substantively enacted by the reporting date. Primarily as a result of the increase to the carrying value of investment properties from the fair value adjustment on transition, an adjustment to the deferred tax liability has been recorded at January 1, 2012. However, as a result of the REIT conversion which was effective January 3, 2013, deferred income tax amounts related to Canadian investment properties have been reversed as an adjustment to deferred income tax expense (note 12). The conversion to a REIT did not impact the deferred income tax balances in any other jurisdiction.

(iv)

Cumulative foreign currency translation adjustments

IAS 21, The Effects of Changes in Foreign Exchange Rates, ("IAS 21") requires an entity to determine the translation differences in accordance with IFRS from the date a subsidiary was formed. In accordance with IFRS 1, the Trust has elected to reset all cumulative translation differences to zero on the date of transition to IFRS.

(v)

Non-controlling interest

The Trust reclassified an amount previously included in accounts payable and accrued liabilities to non-controlling interest in the combined balance sheet.

All the above adjustments have been recorded to opening deficit unless otherwise indicated.

Reconciliation of Net Income and Comprehensive Income as Reported under U.S. GAAP and IFRS

The following is a reconciliation of the Trust's net income and comprehensive income reported in accordance with U.S. GAAP to IFRS for the year ended December 31, 2012.

Year ended December 31,		Note		2012
Net income as reported under U.S. GAAP				$	71,337
Differences increasing (decreasing) the reported amounts:
	Fair value gains recorded under IFRS	(i	)		33,343
	Depreciation and amortization recorded under U.S. GAAP	(ii	)		42,529
	Deferred tax expense	(iii	)		1,796
	Current tax expense	(iii	)		920
	Other	(iv	)		(98	)
Net income as reported under IFRS				$	149,827
Other comprehensive loss reported under U.S. GAAP				$	(8,669	)
	Change in foreign currency translation of foreign operations	(v	)		(2,059	)
Other comprehensive loss reported under IFRS					(10,728	)
Comprehensive income as reported under IFRS				$	139,099

(i)

Fair value gains recorded under IFRS

In accordance with IFRS and the Trust's policy, the Trust measures investment properties at fair value and records changes in fair value in net income during the period of change.

Granite REIT 2013 53

(ii)

Depreciation and amortization under U.S. GAAP

Under U.S. GAAP, investment properties were recorded at cost and depreciated over their estimated lives.

(iii)

Deferred and current tax expense.

IFRS transition adjustments have been tax affected.

(iv)

Other

Certain intangible assets recognized under U.S. GAAP are no longer recognized under IFRS as these values are considered and included in the determination of the fair value of the investment property. Accordingly, the amortization expense associated with these intangibles was reversed. In addition, under IFRS compensation expense is recognized on a proportionate basis consistent with the vesting features of each tranche of the grant whereas under U.S. GAAP compensation expense was recognized on a straight-line basis.

(v)

Change in foreign currency translation of foreign operations

The changes in foreign currency translation of foreign operations are primarily due to the impact of fluctuations in the foreign exchange rates applied to the fair value gains on the Trust's U.S. dollar and euro investment properties. In addition, IAS 21, The Effects of Changes in Foreign Exchange Rates, requires an entity to determine the translation differences in accordance with IFRS from the date a subsidiary was formed. In accordance with IFRS 1, the Trust has elected to deem all cumulative translation differences to be zero on transition to IFRS.

Adjustments to the Statements of Cash Flows

There were no material adjustments to the operating, investing or financing activity subtotals in the 2012 statements of cash flows as a result of the conversion to IFRS.

4.  ACQUISITIONS

Acquisitions of income-producing properties and development lands completed during the year ended December 31, 2013 consist of the following:

(a)

Business combinations — Income-producing properties

Income-producing Properties located in the United States

On February 13, 2013, the Trust, through a 90% owned subsidiary, DGI LS, LLC, acquired two income-producing multipurpose industrial properties. On May 10, 2013, the Trust, through a 95% owned subsidiary, DGI Portland, LLC, acquired an income-producing multipurpose industrial property. On August 9, 2013, the Trust acquired a single-tenant incoming-producing logistics-distribution property.

Income-producing Properties located in Europe

On October 16, 2013, the Trust acquired six single-tenant logistics-distribution income-producing properties, four located in Germany and two located in the Netherlands. The Trust also acquired a single-tenant logistics-distribution income-producing property located in the Netherlands on November 1, 2013, and acquired a single-tenant logistics-distribution facility located in Germany on November 27, 2013.

54 Granite REIT 2013

The following table summarizes the consideration paid for the acquisitions, the fair value of assets acquired, liabilities assumed and the non-controlling interest at the acquisition date:

	U.S. Properties			European Properties			Total
Purchase consideration:
Cash sourced from Credit Facility (note 10) or issuance of 2018 Debentures (note 8(b))	$	44,076		$	188,737		$	232,813
Cash on hand		925			—			925
Contingent consideration		688			—			688
Total consideration paid	$	45,689		$	188,737		$	234,426
Recognized amounts of identifiable assets acquired and liabilities assumed measured at their respective fair values:
Investment properties	$	83,450		$	185,704		$	269,154
Working capital		777			(1,155	)		(378	)
Restricted cash(1)		—			4,188			4,188
Mortgages payable		(36,437	)		—			(36,437	)
Identifiable net assets		47,790			188,737			236,527
Non-controlling interests		(2,101	)		—			(2,101	)
Total	$	45,689		$	188,737		$	234,426

(1)

Restricted cash represents funds held in escrow with respect to property improvements to be undertaken by a tenant at one of the properties located in the Netherlands. These funds will be disbursed to the tenant as completion of the improvements occurs.

During the year ended December 31, 2013, the Trust recognized $9.0 million of revenue and $7.1 million of net income, related to the acquisitions considered business combinations. Had these acquisitions occurred on January 1, 2013, the Trust would have recognized approximately $24.2 million of revenue and $14.7 million of net income during the year ended December 31, 2013.

(b)

Asset purchases — Development lands

On April 15, 2013, the Trust, through a 90% owned subsidiary, DGI Berks, LP, acquired development land in the United States. The Trust, through a 90% owned subsidiary, DGI Shepherdsville, LLC ("DGI Shepherdsville"), also acquired development land in the United States on May 8, 2013. The aggregate purchase price for these development lands was $17.0 million, which included contingent consideration of $2.8 million.

(c)

Transaction costs and contingent consideration

For the year ended December 31, 2013, the Trust incurred transaction costs of $14.2 million related to the above-mentioned acquisitions considered business combinations which include $10.2 million related to land transfer tax for the European acquisitions. These amounts are included in acquisition transaction costs on the combined statements of income.

The contingent consideration recognized in connection with the aforementioned transactions is estimated to be $3.8 million and is expected to be settled in 2018. The fair value of the contingent consideration was estimated using an income approach and is dependent upon achieving certain predetermined returns over a five year period. This estimate is dependent upon a number of assumptions which are subject to change over the period to the date of payment. The non-controlling interest in each partnership was determined using the purchase price paid for the Trust's percentage share interest of the respective partnership.

Granite REIT 2013 55

5.  INVESTMENT PROPERTIES

As at	December 31, 2013		December 31, 2012		January 1, 2012
Income-Producing Properties	$	2,325,583	$	1,941,936	$	1,891,851
Properties and Land Under Development		18,108		1,761		—
Land Held For Development		8,206		—		—
	$	2,351,897	$	1,943,697	$	1,891,851

Changes in investment properties are shown in the following table:

	December 31, 2013									December 31, 2012
As at	Income Producing Properties			Properties and Land Under Development			Land Held For Development			Income Producing Properties			Properties Under Development
Balance, beginning of year	$	1,941,936		$	1,761		$	—		$	1,891,851		$	—
Additions
— Capital expenditures		13,152			14,584			278			14,256			19,295
— Acquisitions		269,154			7,461			9,508			—			—
— Completed projects		6,364			(6,364	)		—			17,499			(17,499	)
Fair value gains (losses), net		(23,297	)		—			(1,927	)		33,133			210
Foreign currency translation, net		135,428			666			347			(11,700	)		(245	)
Disposals		(17,447	)		—			—			(1,221	)		—
Other changes		293			—			—			(1,882	)		—
Balance, end of year	$	2,325,583		$	18,108		$	8,206		$	1,941,936		$	1,761

During the year ended December 31, 2013, the Trust disposed of four income-producing properties located in Canada, the United States, the United Kingdom and Poland, for aggregate net proceeds of $16.8 million and incurred a $0.6 million loss on disposal due to the associated selling costs. The fair value loss during the year ended December 31, 2013 excluding properties sold in the year was $28.5 million. During the year ended December 31, 2012, the Trust disposed of an income-producing property for net proceeds of $1.2 million and recorded a nominal loss on disposal. The fair value gain during the year ended December 31, 2012 excluding the property sold in the year was $33.3 million.

The Trust determines the fair value of each income-producing property based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions and lease renewal at the applicable balance sheet dates, less future cash outflows in respect of such leases. Fair values are primarily determined by discounting the expected future cash flows, generally over a term of 10 years including a terminal value based on the application of a capitalization rate to estimated year 11 cash flows. Properties and land under development that pertain to expansion projects are measured using a discounted cash flow model, net of costs to complete, as of the balance sheet date unless fair value cannot be determined in which case they are valued at cost. The Trust valued land held for development based on its acquisition date fair value. In accordance with its policy, the Trust measures its investment properties using valuations prepared by management. The Trust does not measure its investment properties based on valuations prepared by external appraisers but considers the result of such appraisals in arriving at its own conclusions on values.

56 Granite REIT 2013

The Trust's internal valuation team consists of individuals knowledgeable and experienced in the fair value techniques for investment properties. On a quarterly basis, the fair values of the investment properties are updated by the Trust's internal valuation team for current leasing and market assumptions, utilizing market capitalization rates as provided by independent real estate appraisal firms with representations and expertise in the various jurisdictions our investment properties are located in. The resulting changes in fair values are analyzed at each reporting date and the internal valuation team presents a report to senior management that explains the fair value movements. This report and the results of the updated valuations and processes are formally reviewed by and discussed with senior management quarterly. For all investment properties, the current use equates to the highest and best use.

Valuations are most sensitive to changes in discount rates and terminal capitalization rates. The table below summarizes the sensitivity of the fair value of investment properties to changes in either the discount rate or terminal capitalization rate:

	Discount Rate					Terminal Capitalization Rate
Rate sensitivity	Fair value		Change in fair value			Fair value		Change in fair value
+ 50 basis points	$	2,278,985	$	(72,912	)	$	2,292,334	$	(59,563	)
+ 25 basis points		2,314,150		(37,747	)		2,321,176		(30,721	)
Base rate		2,351,897		—			2,351,897		—
- 25 basis points		2,390,580		38,683			2,384,474		32,577
- 50 basis points		2,430,100		78,203			2,419,258		67,361

The key valuation metrics for investment properties are set out below:

As at	December 31, 2013			December 31, 2012			January 1, 2012
	Maximum	Minimum	Weighted average	Maximum	Minimum	Weighted average	Maximum	Minimum	Weighted average
Canada
Discount rate	8.50%	6.50%	7.76%	8.75%	6.50%	7.87%	8.75%	6.50%	8.11%
Terminal cap rate	8.50%	5.75%	7.26%	8.75%	5.75%	7.36%	9.00%	5.75%	7.61%
United States
Discount rate	14.00%	7.30%	9.35%	14.00%	8.45%	10.07%	14.00%	8.45%	10.18%
Terminal cap rate	13.00%	7.25%	9.24%	13.00%	9.00%	9.92%	13.00%	9.25%	10.04%
Mexico
Discount rate	13.25%	11.75%	12.91%	12.50%	11.25%	11.99%	12.75%	11.50%	12.16%
Terminal cap rate	13.75%	10.75%	12.89%	12.75%	10.25%	11.87%	12.75%	10.50%	11.99%
Germany
Discount rate	9.25%	6.20%	8.15%	9.25%	8.25%	8.37%	9.50%	8.50%	8.63%
Terminal cap rate	9.25%	7.50%	8.37%	9.25%	8.75%	8.87%	9.50%	9.00%	9.13%
Austria
Discount rate	8.75%	8.25%	8.38%	9.00%	8.25%	8.36%	9.00%	8.50%	8.60%
Terminal cap rate	9.25%	8.75%	8.87%	9.50%	8.75%	8.88%	9.50%	9.00%	9.10%
Other
Discount rate	11.00%	6.84%	8.81%	11.50%	9.50%	9.78%	11.75%	9.50%	9.75%
Terminal cap rate	10.50%	7.50%	8.17%	11.75%	8.50%	10.22%	12.00%	8.50%	10.16%

Granite REIT 2013 57

On September 20, 2013, Granite entered into a non-binding letter of intent (the "LOI") for the sale to Magna of Granite's portfolio of Mexican properties currently leased to Magna and representing an aggregate of approximately 2.4 million square feet. On March 5, 2014, Granite entered into an asset purchase agreement with Magna for the sale of the Mexican portfolio at a purchase price of U.S. $105.0 million (note 24(d)). During the year ended December 31, 2013, the Trust incurred costs of $0.3 million related to this transaction, which are included in loss on sale of investment properties on the combined statements of income.

Included in investment properties is $11.2 million (December 31, 2012 — $11.5 million; January 1, 2012 — $12.7 million) of net straight-line rent receivable arising from the recognition of rental revenue on a straight-line basis over the lease term.

Details about contractual obligations to purchase, construct and develop properties can be found in the commitments and contingencies note (note 23).

Minimum rental commitments on non-cancellable tenant operating leases are as follows:

Not later than 1 year	$	214,787
Later than 1 year and not later than 5 years		765,081
Later than 5 years		144,122
	$	1,123,990

6.  NOTES RECEIVABLE

On February 28, 2013, the Trust entered into a settlement agreement for U.S. $5.0 million relating to a holdback receivable ("Meadows note") of a former subsidiary's sale of a property in 2006. The note was payable in U.S. $0.5 million monthly instalments (the Trust's share), commencing March 31, 2013. The final instalment was received on October 4, 2013.

During 2013, the Trust received U.S. $2.5 million relating to the final instalment of an unsecured note, which bore interest at 5.0% per annum.

7.  OTHER ASSETS

Other assets consist of:

As at	December 31, 2013		December 31, 2012		January 1, 2012
Deferred financing costs	$	433	$	222	$	—
Long-term receivables		525		98		427
Interest rate caps (note 9)		678		—		—
Deposits		322		—		—
	$	1,958	$	320	$	427

58 Granite REIT 2013

8.  UNSECURED DEBENTURES, NET

Unsecured debentures, net, consist of:

Carrying value

As at	December 31, 2013		December 31, 2012		January 1, 2012
6.05% Debentures, at amortized cost	$	263,941	$	263,589	$	263,236
4.613% Debentures, at amortized cost		198,129		—		—
	$	462,070	$	263,589	$	263,236

Principal issued and outstanding

As at	Date Issued	Maturity Date	December 31, 2013		December 31, 2012		January 1, 2012
6.05% Debentures	December 22, 2004	December 22, 2016	$	265,000	$	265,000	$	265,000
4.613% Debentures	October 2, 2013	October 2, 2018		200,000		—		—
			$	465,000	$	265,000	$	265,000

(a)

6.05% Debentures

Granite Co. issued the 6.05% senior unsecured debentures (the "2016 Debentures"), at a price of $995.70 per $1,000.00 of principal amount. The 2016 Debentures rank equally with all the Trust's existing and future senior unsecured indebtedness.

The 2016 Debentures are redeemable, in whole or in part, at Granite's option at any time and from time to time, at a price equal to accrued and unpaid interest plus the greater of (a) 100% of the principal amount of the 2016 Debentures to be redeemed; and (b) the Canada Yield Price. The Canada Yield Price means, in respect of a 2016 Debenture, a price equal to which, if the 2016 Debenture were to be issued at such price on the redemption date, would provide a yield thereon from the redemption date to its maturity date equal to 42.5 basis points above the yield that a non-callable Government of Canada bond, trading at par, would carry if issued on the redemption date with a maturity date of December 22, 2016.

Interest on the 2016 Debentures is payable on a semi-annual basis on June 22 and December 22 of each year. The unamortized portion of the $3.1 million of expenses incurred in connection with the issuance of the 2016 Debentures is presented as a reduction of the carrying amount of the 2016 Debentures.

(b)

4.613% Debentures

Granite REIT Holdings Limited Partnership, a wholly owned subsidiary of Granite, issued at par the 4.613% Series 1 senior debentures (the "2018 Debentures"). The 2018 Debentures rank equally with all of the Trust's existing and future unsubordinated and unsecured indebtedness and are guaranteed by Granite and certain of its subsidiaries.

The 2018 Debentures are redeemable, in whole or in part, at Granite's option at any time and from time to time, at a price equal to accrued and unpaid interest plus the greater of (a) 100% of the principal amount of the 2018 Debentures to be redeemed; and (b) the Canada Yield Price. The Canada Yield Price means, in respect of a 2018 Debenture, a price equal to which, if the 2018 Debenture were to be issued at such price on the redemption date, would provide a yield thereon from the redemption date to its maturity date equal to 67.5 basis points above the yield that a non-callable Government of Canada bond, trading at par, would carry if issued on the redemption date with a maturity date of October 2, 2018.

Granite REIT 2013 59

Interest on the 2018 Debentures is payable semi-annually in arrears on April 2 and October 2 of each year, commencing on April 2, 2014. The unamortized portion of the $2.0 million of expenses incurred in connection with the issuance of the 2018 Debentures is presented as a reduction of the carrying amount of the 2018 Debentures.

(c)

Cross Currency Interest Rate Swap

On October 7, 2013, the Trust entered into a cross currency interest rate swap (the "Cross Currency Interest Rate Swap") to exchange the $200.0 million proceeds and related 4.613% interest payments from the 2018 Debentures for euro 142.3 million and euro denominated interest payments at a 3.56% interest rate. Under the terms of the swap, on October 2, 2018, the Trust will repay the principal proceeds received of euro 142.3 million.

As at December 31, 2013, the fair value of the Cross Currency Interest Rate Swap was a net financial liability of $11.0 million, which includes an $11.5 million loss related to the strengthening of the euro against the Canadian dollar. The Cross Currency Interest Rate Swap is designated as a net investment hedge of the Trust's investment in foreign operations. The effectiveness of the hedge is assessed quarterly. For the year ended December 31, 2013, the Trust has assessed that there is no ineffectiveness in this hedge. As an effective hedge, the unrealized gains or losses on the Cross Currency Interest Rate Swap that are related to foreign currency movements are recognized in other comprehensive income. The Trust has elected to record the interest settlements of the Cross Currency Interest Rate Swap in the statement of income.

The net proceeds from the 2018 Debentures and Cross Currency Interest Rate Swap were used to finance the European acquisitions made in 2013.

9.  SECURED LONG-TERM DEBT

(a)

Mortgages payable

The Trust has two mortgages payable totaling $38.8 million (U.S. $36.5 million) relating to the two business acquisitions completed on February 13 and May 10, 2013 (note 4(a)). The mortgages mature on June 10, 2017 and May 10, 2018 respectively and both bear interest at LIBOR plus 2.5%. As a condition of the mortgage agreements, the Trust was required to hedge its interest rate exposure. Accordingly, it purchased interest rate caps for 100% of the mortgage amounts and for the duration of the mortgages thereby limiting its exposure to interest rate fluctuations to a maximum of 4%. The mortgages payable balance is net of deferred financing costs of $0.2 million. Principal mortgage repayments are as follows:

2014	$	217
2015		819
2016		918
2017		24,604
2018		12,211
	$	38,769

The mortgages are recourse to the properties acquired, having a carrying value of $65.4 million at December 31, 2013, which are pledged as collateral.

(b)

Construction loan

On July 25, 2013, DGI Shepherdsville entered into a construction loan (the "Construction Loan") for U.S. $17.0 million relating to the development land purchased in the United States (note 4(b)). The Construction Loan bears interest at LIBOR plus 2.25% and matures on July 25, 2016. Proceeds from the Construction Loan may only be used to pay for the construction cost of improvements on the property and other related costs, and loan advances will be made based on the value of the work completed. The maximum amount available under the Construction Loan may be increased to U.S. $19.0 million, subject

60 Granite REIT 2013

to certain terms and conditions being met. DGI Shepherdsville also has the option to extend the maturity date for two successive periods to July 25, 2017 and 2018, subject to certain terms and conditions. The Construction Loan is secured by a first mortgage lien on the property. At December 31, 2013, $3.3 million (U.S. $3.1 million) had been drawn under the Construction Loan.

10.  BANK INDEBTEDNESS

Effective February 1, 2013, the Trust entered into an unsecured senior revolving credit facility in the amount of $175.0 million that is available by way of Canadian dollar, U.S. dollar or euro denominated loans or letters of credit (the "Credit Facility") and matures on February 1, 2015. However, the Trust has the option to extend the maturity date by one year to February 1, 2016, subject to the agreement of lenders in respect of a minimum of 66²/3% of the aggregate amount committed under the Credit Facility. The Credit Facility provides the Trust with the ability to increase the amount of the commitment by an additional aggregate principal amount of up to $75.0 million with the consent of the participating lenders. Interest on drawn amounts is calculated based on an applicable margin determined by the Trust's external credit rating. Based on the current credit rating, the Trust would be subject to interest at a rate per annum equal to the base rate (i.e. LIBOR, Canadian prime business rate or eurocurrency rate) depending on the currency the Trust borrows in plus an applicable margin of up to 1.63%. At December 31, 2013, the Trust had $53.2 million (U.S. $50.0 million) drawn under the Credit Facility and $1.2 million in letters of credit issued against the Credit Facility.

The Trust previously had an unsecured senior revolving credit facility in the amount of $50.0 million that was replaced by the above mentioned Credit Facility and was available by way of Canadian dollar, U.S. dollar or euro denominated loans or letters of credit (the "2012 Granite Credit Facility"). The 2012 Granite Credit Facility was entered into February 7, 2012 and was scheduled to mature on February 7, 2014. Interest on drawn amounts was calculated based on an applicable margin determined by the Trust's external credit rating. During 2012, the Trust was subject to interest at a rate per annum equal to the base rate (i.e. LIBOR, Canadian prime business rate or Canadian dollar bankers' acceptance rate) depending on the currency borrowed in plus an applicable margin of up to 1.75%. No amounts were drawn under the 2012 Granite Credit Facility as at December 31, 2012. The Trust did not have a credit facility as at January 1, 2012.

11.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of:

As at	December 31, 2013		December 31, 2012		January 1, 2012
Accounts payable	$	5,828	$	5,558	$	4,538
Accrued salaries and wages		4,771		3,913		1,549
Accrued interest payable		2,708		387		387
Accrued construction payable		7,141		8,167		4,233
Accrued acquisition costs		1,733		—		—
Accrued stapled unit options		356		—		—
Accrued executive deferred stapled units		1,395		—		—
Accrued trustee/director unit-based compensation		3,291		2,283		986
Other accrued liabilities		5,955		5,647		2,264
	$	33,178	$	25,955	$	13,957

Granite REIT 2013 61

12.  INCOME TAXES

(a)

The major components of the income tax expense (recovery) are:

Years ended December 31,	2013			2012
Current income tax:
Current taxes	$	6,000		$	15,987
Withholding taxes and other		4,490			2,665
		10,490			18,652
Deferred income tax:
Origination and reversal of temporary differences		4,555			17,948
Impact of changes in tax rates		699			4,095
Reversal of withholding taxes on profits of subsidiaries		(4,430	)		(2,665	)
Reversal of deferred tax liability upon REIT conversion and related reorganizations		(41,950	)		(22,859	)
Other		(699	)		(3,442	)
		(41,825	)		(6,923	)
Income tax expense (recovery)	$	(31,335	)	$	11,729

(b)

The effective income tax rate reported in the combined statements of income varies from the Canadian statutory rate for the following reasons:

Years ended December 31,	2013			2012
Income before income taxes	$	113,931		$	161,556
Expected income taxes at the Canadian statutory tax rate of 26.5% (2012 — 26.5%)	$	30,192		$	42,812
Income distributed and taxable to unitholders		(23,735	)		—
Reversal of deferred tax liability upon REIT conversion and related reorganizations		(41,950	)		(22,859	)
Net foreign rate differentials		2,698			(12,553	)
Net change in provisions for uncertain tax positions		(194	)		1,568
Net permanent differences		(873	)		(374	)
Net effect of change in tax rates		699			4,095
Withholding taxes and other items		1,828			(960	)
Income tax expense (recovery)	$	(31,335	)	$	11,729

62 Granite REIT 2013

(c)

Deferred tax assets and liabilities consist of temporary differences related to the following:

As at		December 31, 2013		December 31, 2012			January 1, 2012
Deferred tax assets:
	Investment properties	$	2,447	$	—		$	—
	Eligible capital expenditures		3,509		—			—
	Other		2,217		—			—
	Total deferred tax assets		8,173		—			—
Deferred tax liabilities:
	Investment properties		165,362		185,249			190,492
	Eligible capital expenditures		—		(4,635	)		(3,604	)
	Withholding tax on undistributed subsidiary profits		1,014		4,741			5,645
	Other		246		(140	)		840
	Total deferred tax liabilities		166,622		185,215			193,373
Net deferred tax liabilities		$	158,449	$	185,215		$	193,373

(d)

Changes in the net deferred tax liabilities consist of the following:

Years ended December 31,	2013			2012
Balance, beginning of year	$	185,215		$	193,373
Deferred tax recovery recognized in net income		(41,825	)		(6,923	)
Foreign currency translation of deferred tax balances		15,059			(1,235	)
	$	158,449		$	185,215

(e)

Net cash payments of income taxes amounted to $14.5 million for the year ended December 31, 2013 which includes $4.2 million of withholding taxes (2012 — $28.6 million).

(f)

The Trust conducts operations in a number of countries with varying statutory rates of taxation. Judgment is required in the estimation of income taxes and deferred income tax assets and liabilities, in each of the Trust's operating jurisdictions. This process involves estimating actual current tax exposure, assessing temporary differences that result from the different treatments of items for tax and accounting purposes, assessing whether it is more likely than not that deferred income tax assets will be realized and, based on all the available evidence, determining if a valuation allowance is required on all or a portion of such deferred income tax assets. The Trust reports a liability for uncertain tax positions ("unrecognized tax benefits") taken or expected to be taken in a tax return. The Trust recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

As at December 31, 2013, the Trust had $14.2 million (2012 — $12.3 million) of unrecognized income tax benefits (including $0.3 million (2012 — $0.9 million) of related accrued interest and penalties), all of which could ultimately reduce the Trust's effective tax rate. The Trust is currently under audit in Canada for the 2004 through 2006 taxation years for specific open issues, the United States and Germany. The Trust believes that it has adequately provided for reasonably foreseeable outcomes related to the tax examinations and that any resolution will not have a material adverse effect on the combined financial position or results from operations. However, the Trust cannot predict with any level of certainty the exact nature of any future possible outcome.

Granite REIT 2013 63

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

As at	December 31, 2013			December 31, 2012
Unrecognized tax benefits balance, beginning of year	$	12,263		$	10,885
Increases (decreases) for tax positions of prior years		(510	)		598
Increases for tax positions of current year		1,749			862
Foreign currency impact		663			(82	)
Unrecognized tax benefits balance, end of year	$	14,165		$	12,263

It is reasonably possible that the gross unrecognized tax benefits, as of December 31, 2013, could decrease in the next 12 months by an estimated range of a nominal amount to $5.5 million (2012 — $3.6 million to $4.9 million) relating primarily to tax years becoming statute barred for purposes of future tax examinations by local taxing authorities and the outcome of current tax examinations.

For the year ended December 31, 2013, $0.1 million of interest and penalties was recorded (2012 — $0.1 million) as part of the provision for income taxes in the combined statements of income.

As at December 31, 2013, the following tax years remained subject to examination by the major tax jurisdictions:

Major Jurisdictions
Canada	2004 through 2006 and 2008 through 2013
United States	2011 through 2013
Mexico	2009 through 2013
Austria	2009 through 2013
Germany	2008 through 2011

As at December 31, 2013, the Trust had approximately $420.0 million of Canadian capital loss carryforwards that do not expire, approximately $540.0 million of Foreign Investment in Real Property Tax Act losses that will expire in 2015 and 2017, and other losses and deductible temporary differences in various tax jurisdictions of approximately $12.0 million. The Trust believes it is not probable that these tax assets can be realized; and accordingly, no deferred tax asset was recognized at December 31, 2013.

13.  STAPLED UNITHOLDERS' AND SHAREHOLDERS' EQUITY

(a)

Stapled Units and Common Shares

In accordance with the Arrangement (note 1), effective January 3, 2013, all the common shares of Granite Co. were exchanged, on a one-for-one basis, for stapled units, each of which consists of one unit of Granite REIT and one common share of Granite GP. Granite REIT is authorized to issue an unlimited number of units. Granite GP's authorized share capital consists of an unlimited number of common shares without par value. Each stapled unit is entitled to distributions and/or dividends in the case of Granite GP as and when declared and, in the event of termination of Granite REIT and Granite GP, to the net assets of Granite REIT and Granite GP remaining after satisfaction of all liabilities.

(b)

Unit-based Compensation

Incentive Stock Option Plan

On August 29, 2003, Granite Co.'s Board of Directors approved the Incentive Stock Option Plan (the "Option Plan"), which allows for the grant of stock options or stock appreciation rights to directors, officers, employees and consultants. As a result of the Arrangement, option holders exchanged their existing options to acquire Granite Co. common shares for options to acquire stapled units on a

64 Granite REIT 2013

one-for-one basis. The Option Plan was also amended in connection with the Arrangement to make other changes required to conform to the REIT structure. At December 31, 2013, a maximum of 2.0 million stapled units are available to be issued under the Option Plan. Options expire on the 10^th anniversary of the date of grant, subject to earlier cancellation from events specified in each recipient's option agreement. No options have been granted since August 2010.

A reconciliation of the changes in the options outstanding is presented below:

	2013				2012
	Number (000s)		Weighted Average Exercise Price		Number (000s)		Weighted Average Exercise Price
Options outstanding, January 1	205		$	32.01	235		$	31.99
Exercised	(105	)		30.20	(30	)		31.85
Options outstanding and exercisable, December 31	100		$	33.92	205		$	32.01

Options Outstanding and Exercisable

Year of Issuance	Number (000s)	Exercise Price		Weighted Average Remaining Life in Years
2004	50	$	35.62	1.0
2007	50		32.21	3.7
	100	$	33.92	2.3

Director/Trustee Deferred Share Unit Plan

Effective November 3, 2003, Granite Co. established a Non-Employee Director Share-Based Compensation Plan (the "DSP"), which provides for a deferral of up to 100% of each outside director's total annual remuneration, at specified levels elected by each director, until such director ceases to be a director. In connection with the Arrangement, effective January 3, 2013, the DSP was amended to entitle the holder to receive a payment based on the fair market value of a preferred share of Granite Co. that is equal in value to a stapled unit of the Trust. In addition, effective January 3, 2013, a new deferred share unit plan (the "new DSP") was established by Granite GP whereby each non-employee director/trustee is entitled to receive a portion of their annual retainer (and to elect to receive up to 100% of their annual remuneration) as deferred share units, which entitles them to receive a payment based on the fair market value of a preferred share of Granite Co. that is equal in value to a stapled unit.

The amounts deferred under the DSP and new DSP plans are reflected by notional deferred share units ("DSUs") whose value at the time that the particular payment to the director is determined reflects the fair market value of the Granite Co. preferred shares. The value of a DSU thus appreciates or depreciates with changes in the market price of the stapled units. The DSP and new DSP also provide for the accrual of notional distribution equivalents on any distributions paid on the stapled units. Under the DSP and new DSP, when a director or trustee leaves the Board, the director or trustee receives a cash payment at an elected date equal to the value of the accrued DSUs at such date. There is no option under the DSP and new DSP for directors or trustees to receive stapled units in exchange for DSUs.

Granite REIT 2013 65

A reconciliation of the changes in DSUs outstanding is presented below:

	2013			2012
	Number (000s)	Weighted Average Grant Date Fair Value		Number (000s)	Weighted Average Grant Date Fair Value
DSUs outstanding, January 1	61	$	30.95	31	$	26.73
Granted	26		37.62	30		35.18
DSUs outstanding, December 31	87	$	32.92	61	$	30.95

Executive Deferred Stapled Unit Plan

Effective August 7, 2011, Granite Co. established an Executive Share Unit Plan which was amended, effective January 3, 2013, as a result of the Arrangement to conform to the REIT structure (the "Stapled Unit Plan"). The Stapled Unit Plan is designed to provide equity-based compensation in the form of stapled units to executives and other employees (the "Participants"). The maximum number of stapled units which may be issued pursuant to the Stapled Unit Plan is 1.0 million. The Stapled Unit Plan entitles a Participant to receive a stapled unit or a cash payment equal to the market value of the stapled unit, which on any date is the volume weighted average trading price of a stapled unit on the TSX or NYSE over the preceding five trading days. The form of redemption of the stapled units is determined by the Compensation Committee and is not at the option of the Participant. Vesting conditions in respect of a grant are determined by the Compensation Committee at the time the grant is made and may result in the vesting of more or less than 100% of the number of stapled units. The Stapled Unit Plan also provides for the accrual of distribution equivalent amounts based on distributions paid on the stapled units. Stapled units are, unless otherwise agreed, settled within 60 days following vesting.

A reconciliation of the changes in stapled units outstanding is presented below:

	2013				2012
	Number (000s)		Weighted Average Grant Date Fair Value		Number (000s)		Weighted Average Grant Date Fair Value
Stapled units outstanding, January 1	38		$	35.63	26		$	25.42
Granted	31			39.03	40			35.61
Settled	(7	)		35.41	(24	)		25.69
Forfeited	—			—	(4	)		25.42
Stapled units outstanding, December 31	62		$	37.42	38		$	35.63

At December 31, 2013, unrecognized compensation cost related to the Stapled Unit Plan was $1.0 million, which will be amortized over the weighted average remaining requisite service period of approximately 1.2 years.

During the year, the Trust recognized unit-based compensation expense of $2.1 million (2012 — $1.9 million), which includes a $1.0 million expense (2012 — $1.4 million) pertaining to the DSP and new DSP, a $1.1 million expense (2012 — $0.5 million) pertaining to the Stapled Unit Plan and a net expense of nil (2012 — nil) related to the re-measurement of the Option Plan liability in the period.

66 Granite REIT 2013

(c)

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consists of the following:

As at	December 31, 2013			December 31, 2012
Foreign currency translation gains (losses) on investments in subsidiaries, net of related hedging activities and non-controlling interests	$	108,551		$	(10,784	)
Losses on derivatives designated as net investment hedges		(11,490	)		—
	$	97,061		$	(10,784	)

14.  DISTRIBUTIONS TO STAPLED UNITHOLDERS

Total distributions declared to stapled unitholders in the year ended December 31, 2013 were $98.9 million (2012 — $93.5 million) or $2.11 per stapled unit (2012 — $1.99 per common share). At December 31, 2013, $8.6 million, representing the December 2013 distribution, remained unpaid. Subsequent to December 31, 2013, distributions of 18.3 cents per stapled unit were declared on January 17 and February 18, 2014. The distribution declared in January 2014 in the amount of $8.6 million was paid on February 14, 2014 and the distribution declared in February 2014 of $8.6 million will be paid on March 14, 2014.

15.  OPERATING COSTS AND EXPENSES (INCOME)

(a)

Property operating costs consist of:

Years ended December 31,	2013		2012
Non-recoverable from tenants
Property taxes and utilities	$	1,162	$	2,457
Legal		1,161		759
Environmental and appraisals		772		1,753
Repairs and maintenance		617		205
Other		715		408
	$	4,427	$	5,582

Years ended December 31,	2013		2012
Recoverable from tenants
Property taxes and utilities	$	692	$	—
Repairs and maintenance		182		—
Other		273		—
	$	1,147	$	—

Granite REIT 2013 67

(b)

General and administrative expenses consist of:

Years ended December 31,	2013		2012
Salaries and benefits	$	14,045	$	12,491
Audit, legal and consulting		4,159		3,725
REIT conversion and reorganization related costs		2,479		7,914
Trustee/director fees and related expenses		1,970		1,794
Other		4,660		5,087
	$	27,313	$	31,011

(c)

Interest expense and other financing costs, net consist of:

Years ended December 31,	2013			2012
Interest, accretion and costs on debentures	$	18,250		$	16,385
Interest on mortgages payable		877			—
Amortization of deferred financing costs		589			188
Other interest		1,310			309
		21,026			16,882
Capitalized interest		(119	)		(491	)
Interest income		(322	)		(520	)
	$	20,585		$	15,871

(d)

Fair value gains (losses) on financial instruments consist of:

Years ended December 31,	2013		2012
Foreign exchange forward contracts	$	—	$	(359	)
Interest rate caps		72		—
	$	72	$	(359	)

16.  SEGMENTED DISCLOSURE INFORMATION

The Trust has one reportable segment — the ownership and rental of industrial real estate as determined by the information reviewed by the chief operating decision maker who is the chief executive officer. The following tables present certain information with respect to geographic segmentation:

Revenues

Years ended December 31,	2013		2012
Canada	$	62,762	$	61,319
United States		39,865		31,632
Mexico		13,347		12,297
Austria		60,782		54,185
Germany		20,535		17,224
Netherlands		1,762		—
Other Europe		4,194		4,458
	$	203,247	$	181,115

68 Granite REIT 2013

For the year ended December 31, 2013, revenues from Magna were approximately 92% (2012 — 97%) of the Trust's total revenues.

Investment properties

As at	December 31, 2013		December 31, 2012		January 1, 2012
Canada	$	701,130	$	707,526	$	687,218
United States		451,431		309,100		296,161
Mexico		111,678		113,017		112,772
Austria		674,610		603,976		590,603
Germany		276,228		173,474		168,583
Netherlands		101,522		—		—
Other Europe		35,298		36,604		36,514
	$	2,351,897	$	1,943,697	$	1,891,851

17.  EARNINGS PER STAPLED UNIT OR COMMON SHARE

Basic and diluted earnings per stapled unit or common share are computed using the following inputs:

Years ended December 31,		2013		2012
Net income attributable to stapled unitholders' or common shareholders'		$	145,031	$	149,756
Weighted average number of stapled units or common shares outstanding during the year — basic (in thousands)			46,925		46,855
Adjustment:
	Options and stapled/share units		24		21
Weighted average number of stapled units or common shares outstanding during the year — diluted (in thousands)			46,949		46,876

The computation of diluted earnings per stapled unit or share for the year ended December 31, 2013 excludes the effect of the potential exercise of nil options (2012 — 50,000) to acquire stapled units or common shares because these options were anti-dilutive.

18.  DETAILS OF CASH FROM OPERATING ACTIVITIES

(a)

Items not involving current cash flows are shown in the following table:

Years ended December 31,	2013			2012
Straight-line rent adjustment	$	1,248		$	1,105
Unit-based compensation expense		2,105			1,729
Fair value losses (gains) on investment properties		25,224			(33,343	)
Depreciation and amortization		454			244
Fair value losses (gains) on financial instruments		(72	)		359
Gain on settlement of Meadows note		(5,143	)		—
Loss on sale of investment properties		1,122			21
Amortization of issuance costs and accretion of discount of debentures		494			353
Amortization of deferred financing costs		589			188
Foreign exchange on note receivable		(115	)		174
Deferred income taxes		(41,825	)		(6,923	)
Other		(597	)		1,339
	$	(16,516	)	$	(34,754	)

Granite REIT 2013 69

(b)

Changes in working capital balances are shown in the following table:

Years ended December 31,	2013			2012
Accounts receivable	$	1,304		$	2,945
Prepaid expenses and other		(222	)		(100	)
Accounts payable and accrued liabilities		(256	)		6,431
Deferred revenue		(1,055	)		1,997
Restricted cash		522			(522	)
	$	293		$	10,751

(c)

Non-cash financing activities

During the year ended December 31, 2013, 7 thousand stapled units with a value of $0.3 million were issued under the Trust's executive deferred stapled unit plan.

During the year ended December 31, 2012, 15 thousand common shares with a value of $0.4 million were issued under the Trust's executive deferred stapled unit plan.

19.  FAIR VALUE AND RISK MANAGEMENT

(a)

Fair Value of Financial Instruments

The following table provides the classification and measurement of financial assets and liabilities as at December 31, 2013:

	Fair value through profit or loss		Loans and receivables/ other financial liabilities
							Total
									Total
			(Amortized cost)				(Carrying Value)
Measurement basis	(Fair value)				(Fair value)				(Fair Value)
Financial assets
Interest rate caps included in other assets	$	678	$	—	$	—	$	678	$	678
Accounts receivable		—		2,491		2,491		2,491		2,491
Restricted cash		—		4,360		4,360		4,360		4,360
Cash and cash equivalents		—		95,520		95,520		95,520		95,520
	$	678	$	102,371	$	102,371	$	103,049	$	103,049
Financial liabilities
Unsecured debentures, net	$	—	$	462,070	$	485,558	$	462,070	$	485,558
Cross Currency Interest Rate Swap		11,003		—		—		11,003		11,003
Secured long-term debt		—		41,856		41,856		41,856		41,856
Contingent consideration		—		3,777		3,777		3,777		3,777
Bank indebtedness		—		53,180		53,180		53,180		53,180
Accounts payable and accrued liabilities		—		33,178		33,178		33,178		33,178
Distributions payable		—		8,591		8,591		8,591		8,591
	$	11,003	$	602,652	$	626,140	$	613,655	$	637,143

70 Granite REIT 2013

The following table provides the classification and measurement of financial assets and liabilities as at December 31, 2012:

	Fair value through profit or loss			Loans and receivables/ other financial liabilities
								Total
										Total
				(Amortized cost)				(Carrying Value)
Measurement basis	(Fair value)					(Fair value)				(Fair Value)
Financial assets
Note receivable	$	—		$	2,612	$	2,612	$	2,612	$	2,612
Accounts receivable		—			3,662		3,662		3,662		3,662
Restricted cash		—			522		522		522		522
Cash and cash equivalents		—			51,073		51,073		51,073		51,073
	$	—		$	57,869	$	57,869	$	57,869	$	57,869
Financial liabilities
Unsecured debentures, net	$	—		$	263,589	$	294,161	$	263,589	$	294,161
Accounts payable and accrued liabilities		359	(1)		25,596		25,596		25,955		25,955
	$	359		$	289,185	$	319,757	$	289,544	$	320,116

(1)

Foreign exchange forward contracts included in accounts payable and accrued liabilities.

The following table provides the classification and measurement of financial assets and liabilities as at January 1, 2012:

	Fair value through profit or loss		Loans and receivables/ other financial liabilities
							Total
									Total
			(Amortized cost)				(Carrying Value)
Measurement basis	(Fair value)				(Fair value)				(Fair Value)
Financial assets
Note receivable	$	—	$	7,882	$	7,882	$	7,882	$	7,882
Accounts receivable		—		6,557		6,557		6,557		6,557
Cash and cash equivalents		—		56,908		56,908		56,908		56,908
	$	—	$	71,347	$	71,347	$	71,347	$	71,347
Financial liabilities
Unsecured debentures, net	$	—	$	263,236	$	291,781	$	263,236	$	291,781
Accounts payable and accrued liabilities		—		13,957		13,957		13,957		13,957
	$	—	$	277,193	$	305,738	$	277,193	$	305,738

The fair value of the Trust's accounts receivable, cash and cash equivalents, restricted cash, bank indebtedness, accounts payable and accrued liabilities and distributions payable approximate their carrying amounts due to the relatively short periods to maturity of these financial instruments. The fair value of contingent consideration approximates the carrying value as it is revalued at each reporting date. The fair value of the unsecured debentures is determined using quoted market prices. The fair value of

Granite REIT 2013 71

the Cross Currency Interest Rate Swap is determined using market inputs quoted by its counterparties. The fair value of the mortgages and construction loan payable approximate their carrying amount as they were drawn recently and bear interest at rates comparable to current market rates that would be used to calculate fair value.

The Trust periodically purchases foreign exchange forward contracts to hedge specific anticipated foreign currency transactions and mitigate its foreign exchange exposure on its net cash flows. At December 31, 2013, the Trust held no foreign exchange forward contracts (December 31, 2012 — liability of $0.4 million on two contacts outstanding; January 1, 2012 — no contracts outstanding). For the year ended December 31, 2013, the Trust incurred no unrealized fair value gains or losses with respect to foreign exchange forward contracts (2012 — $0.4 million fair value loss).

As disclosed in note 9, the Trust entered into two interest rate caps to hedge the interest rate risk associated with the mortgages payable. The interest rate caps have not been designated and the Trust is not employing hedge accounting for these instruments. The fair value of the interest rate caps at December 31, 2013 was $0.7 million. During the year, the Trust recorded an unrealized net fair value gain of $0.1 million (2012 — nil).

(b)

Fair Value Hierarchy

Fair value measurements are based on inputs of observable and unobservable market data that a market participant would use in pricing an asset or liability. IFRS establishes a fair value hierarchy which is summarized below:

Level 1:	Fair value determined based on quoted prices in active markets for identical assets or liabilities.
Level 2:	Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active.
Level 3:	Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows or similar techniques.

The following tables represent information related to the Trust's assets and liabilities measured or disclosed at fair value on a recurring and non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall.

As at December 31, 2013	Level 1			Level 2			Level 3
ASSETS AND LIABILITIES MEASURED OR DISCLOSED AT FAIR VALUE
Assets measured at fair value
Investment properties	$	—		$	—		$	2,351,897
Interest rate caps included in other assets		—			678			—
Liabilities measured or disclosed at fair value
Unsecured debentures, net		485,558			—			—
Cross Currency Interest Rate Swap		—			11,003			—
Contingent consideration(1)		—			—			3,777
Secured long-term debt		—			41,856			—
Bank indebtedness		—			53,180			—
Net Assets (Liabilities) measured at fair value	$	(485,558	)	$	(105,361	)	$	2,348,120

(1)

Refer to note 4, Acquisitions, for a description of the valuation technique used in the fair value measurement of contingent consideration.

72 Granite REIT 2013

As at December 31, 2012	Level 1			Level 2			Level 3
ASSETS AND LIABILITIES MEASURED OR DISCLOSED AT FAIR VALUE
Assets measured at fair value
Investment properties	$	—		$	—		$	1,943,697
Liabilities measured or disclosed at fair value
Unsecured debentures, net		294,161			—			—
Foreign exchange forward contracts included in accounts payable and accrued liabilities		—			359			—
Net Assets (Liabilities) measured at fair value	$	(294,161	)	$	(359	)	$	1,943,697

As at January 1, 2012	Level 1			Level 2		Level 3
ASSETS AND LIABILITIES MEASURED OR DISCLOSED AT FAIR VALUE
Assets measured at fair value
Investment properties	$	—		$	—	$	1,891,851
Liabilities measured or disclosed at fair value
Unsecured debentures, net		291,781			—		—
Net Assets (Liabilities) measured at fair value	$	(291,781	)	$	—	$	1,891,851

For assets and liabilities that are measured at fair value on a recurring basis, the Trust determines whether transfers between the levels of the fair value hierarchy have occurred by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the years ended December 31, 2013 and 2012, there were no transfers between the levels.

Refer to note 5, Investment Properties, for a description of the valuation techniques and inputs used in the fair value measurement and for a reconciliation of the fair value measurements of investment properties in Level 3.

(c)

Risk Management

The main risks arising from the Trust's financial instruments are credit, interest rate, foreign exchange and liquidity risks. The Trust's approach to managing these risks is summarized below:

(i)

Credit risk

The Trust's financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts receivable and notes receivable.

Cash and cash equivalents include short-term investments, such as commercial paper, which are invested in governments, financial institutions and corporations with a minimum credit rating of A — (based on Standard & Poor's ("S&P") rating scale) or A3 (based on Moody's Investor Services' rating scale). Concentration of credit risk is further reduced by limiting the amount that is invested in any one government, financial institution or corporation.

Magna accounts for approximately 92% of the Trust's rental revenue. Although its operating subsidiaries are not individually rated, Magna International Inc. has an investment grade credit rating from S&P and Dominion Bond Rating Service which mitigates the Trust's credit risk. Substantially all of the Trust's accounts receivable are collected within 30 days. The balance of accounts receivable past due is not significant.

Granite REIT 2013 73

(ii)

Interest rate risk

As at December 31, 2013, the Trust's exposure to interest rate risk is not significant. Approximately 83% of the Trust's debt consists of fixed rate debt; $263.9 million for the 2016 Debentures that have a fixed interest rate of 6.05% and mature in December 2016 and $209.1 million for the 2018 Debentures that have an effective fixed interest rate of 3.56% after taking into account its Cross Currency Interest Rate Swap and mature October 2018. The interest rate on the $38.6 million mortgage debt, maturing in June 2017 and May 2018, is capped at 4.0% as a result of the interest rate caps that were entered into. As a result, only 10% or $56.5 million of the Trust's debt is exposed to variable interest rate risk.

(iii)

Foreign exchange risk

As at December 31, 2013, the Trust is exposed to foreign exchange risk primarily in respect of movements in the euro and the U.S. dollar. The Trust is structured such that its foreign operations are primarily conducted by entities with a functional currency which is the same as the economic environment in which the operations take place. As a result, the net income impact of currency risk associated with financial instruments is limited as its financial assets and liabilities are generally denominated in the functional currency of the subsidiary that holds the financial instrument. However, the Trust is exposed to foreign currency risk on its net investment in its foreign currency denominated operations and certain Trust level foreign currency denominated assets and liabilities. At December 31, 2013, the Trust's foreign currency denominated net assets are $1.1 billion primarily in U.S. dollars and euros. A 1% change in the U.S. dollar and euro exchange rates relative to the Canadian dollar will result in a gain or loss of approximately $2.1 million and $8.4 million, respectively, to comprehensive income.

Granite generates rental income that is not all denominated in Canadian dollars. Since the financial results are reported in Canadian dollars, the Trust is subject to foreign currency fluctuations that could, from time to time, have an impact on the operating results. For the year ended December 31, 2013, a 1% change in the U.S. dollar and euro exchange rates relative to the Canadian dollar would have impacted rental income and tenant recoveries by approximately $0.5 million and $0.9 million respectively.

For the year ended December 31, 2013, the Trust designated its U.S. dollar borrowings of $50.0 million under the Credit Facility as a hedge of its net investment in the U.S. operations. In addition, the Trust has designated its Cross Currency Interest Rate Swap as a hedge of its net investment in the European operations (note 8(c)).

(iv)

Liquidity risk

Liquidity risk is the risk the Trust will encounter difficulties in meeting its financial obligations. The Trust will be subject to the risks associated with debt financing, including the risk that it's Credit Facility, mortgages payable and the Construction Loan will not be able to be refinanced. The Trust's objectives in minimizing liquidity risk are to maintain prudent levels of leverage on its investment properties and stagger its debt maturity profile. In addition, the Declaration of Trust establishes certain debt ratio limits.

74 Granite REIT 2013

The contractual maturities of the Trust's financial liabilities are summarized below:

				Payments due by year
As at December 31, 2013
		Total		2014		2015		2016		2017		2018		Thereafter
Unsecured debentures		$	465,000	$	—	$	—	$	265,000	$	—	$	200,000	$	—
Cross Currency Interest Rate Swap			11,003		—		—		—		—		11,003		—
Secured long-term debt(1)			42,065		217		819		4,214		24,604		12,211		—
Bank indebtedness(1)			53,180		—		53,180		—		—		—		—
Interest expense(2)
	Unsecured debentures, net of Cross Currency Interest Rate Swap		83,726		23,180		23,153		23,153		7,120		7,120		—
	Secured long-term debt		3,554		1,046		1,034		1,011		361		102		—
	Bank indebtedness		1,037		957		80		—		—		—		—
Contingent consideration			3,777		—		—		—		—		3,777		—
Accounts payable and accrued liabilities			33,178		32,083		985		110		—		—		—
Distribution payable			8,591		8,591		—		—		—		—		—
		$	705,111	$	66,074	$	79,251	$	293,488	$	32,085	$	234,213	$	—

(1)

Contractual maturities do not reflect extension options available to the Trust.



(2)

Represents aggregate interest expense expected to be paid over the term of the debt, on an undiscounted basis, based on current interest and foreign exchange rates.

20.  CAPITAL MANAGEMENT

The Trust's capital structure comprises the total of the stapled unitholders' equity and consolidated debt. The total managed capital of the Trust is summarized below:

As at	December 31, 2013		December 31, 2012		January 1, 2012
Unsecured debentures, net	$	462,070	$	263,589	$	263,236
Cross Currency Interest Rate Swap		11,003		—		—
Secured long-term debt		41,856		—		—
Bank indebtedness		53,180		—		—
Total debt		568,109		263,589		263,236
Stapled unitholders' or shareholders' equity		1,671,227		1,514,812		1,470,634
Total managed capital	$	2,239,336	$	1,778,401	$	1,733,870

The Trust manages, monitors and adjusts its capital balances in response to the availability of capital, economic conditions and investment opportunities with the following objectives in mind:

•

Compliance with investment and debt restrictions pursuant to the Declaration of Trust;



•

Compliance with existing debt covenants;



•

Maintaining investment grade credit ratings;



•

Supporting the Trust's business strategies including: ongoing operations, property development and acquisitions;



•

Generating stable and growing cash distributions; and



•

Building long-term unitholder value.

Granite REIT 2013 75

The Declaration of Trust contains certain provisions with respect to capital management which include:

•

The Trust shall not incur or assume any indebtedness if, after giving effect to the incurring or assumption of the indebtedness, the total indebtedness of the Trust would be more than 65% of the Gross Book Value (as defined in the Declaration of Trust); and



•

The Trust shall not invest in raw land for development, except for (i) existing properties with additional development, (ii) the purpose of renovating or expanding existing properties, or (iii) the development of new properties, provided that the aggregate cost of the investments of the Trust in raw land, after giving effect to proposed investment, will not exceed 15% of Gross Book Value.

Currently, the Trust's consolidated debt consists of the Credit Facility, the 2016 Debentures, the 2018 Debentures, property specific mortgage financing and the Construction Loan and each of these components has various financial covenants. These covenants are defined within the relevant document and, depending on the debt instrument, include a total indebtedness ratio, a secured indebtedness ratio, interest and asset coverage ratio, unencumbered asset ratio and maximum payout ratio. The Trust monitors these provisions and covenants and was in compliance with their respective requirements at December 31, 2013.

Distributions are made at the discretion of the Board of Trustees (the "Board"). However, Granite REIT intends to distribute each year all of its taxable income as calculated in accordance with the Income Tax Act. For the fiscal year 2013, the Trust provided to its unitholders a monthly distribution of $0.175 per stapled unit which was increased to $0.183 per stapled unit for December's distribution. The Board determined this distribution level having considered, among other factors, estimated 2013 and 2014 funds from operations and capital requirements, the alignment of its current and targeted payout ratios with the Trust's strategic objectives and compliance with the above noted provisions and financial covenants.

21.  RELATED PARTY TRANSACTIONS

Key management personnel include the Trustees/Directors, the Chief Executive Officer and the Chief Financial Officer. Information with respect to the Trustees/Directors fees is included in note 15(b). The compensation paid or payable to the Trust's key management personnel for services was as follows:

Years ended December 31,	2013		2012
Salaries, incentives and short-term benefits	$	2,404	$	2,112
Unit-based compensation		716		438
	$	3,120	$	2,550

76 Granite REIT 2013

22.  COMBINED FINANCIAL INFORMATION

The combined financial statements include the financial position and results of operations and cash flows of each of Granite REIT and Granite GP. Prior to January 3, 2013, the operating results were consolidated by Granite Co. and therefore there is no comparative financial information presented. Below is a summary of the financial information for each entity along with the elimination entries and other adjustments that aggregate to the combined financial statements:

Balance Sheet	As at December 31, 2013
	Granite REIT		Granite GP	Eliminations/ Adjustments		Granite REIT and Granite GP Combined
ASSETS
Non-current assets:
Investment properties	$	2,351,897				$	2,351,897
Deferred tax assets		8,173					8,173
Investment in Granite LP		—	2	(2	)		—
Other non-current assets		3,896					3,896
		2,363,966	2	(2	)		2,363,966
Current assets:
Other current assets		9,147					9,147
Intercompany receivable		—	850	(850	)		—
Cash and cash equivalents		95,520					95,520
Total assets	$	2,468,633	852	(852	)	$	2,468,633
LIABILITIES AND STAPLED UNITHOLDERS' EQUITY
Non-current liabilities:
Unsecured debentures, net	$	462,070				$	462,070
Cross Currency Interest Rate Swap		11,003					11,003
Deferred tax liabilities		166,622					166,622
Other non-current liabilities		45,633					45,633
		685,328					685,328
Current liabilities:
Bank indebtedness		53,180					53,180
Intercompany payable		850		(850	)		—
Other current liabilities		52,765	850				53,615
Total liabilities		792,123	850	(850	)		792,123
Equity:
Stapled unitholders' equity		1,671,225	2				1,671,227
Non-controlling interests		5,285		(2	)		5,283
Total liabilities and stapled unitholders' equity	$	2,468,633	852	(852	)	$	2,468,633

Granite REIT 2013 77

Income Statement	Year ended December 31, 2013
	Granite REIT			Granite GP		Eliminations/ Adjustments		Granite REIT and Granite GP Combined
Revenues	$	203,247						$	203,247
Operating costs and expenses (income)
General and administrative		27,313							27,313
Interest expense and other financing costs, net		20,585							20,585
Other costs and expenses		6,041							6,041
Share of (income) loss of Granite LP		—		(2	)	2			—
Income before fair value changes, acquisition transaction costs, gain on Meadows holdback, loss on sale of investment properties and income taxes		149,308		2		(2	)		149,308
Fair value losses on investment properties, net		(25,224	)						(25,224	)
Fair value gains on financial instruments		72							72
Acquisition transaction costs		(14,246	)						(14,246	)
Gain on Meadows holdback		5,143							5,143
Loss on sale of investment properties		(1,122	)						(1,122	)
Income before income taxes		113,931		2		(2	)		113,931
Income tax recovery		(31,335	)						(31,335	)
Net Income		145,266		2		(2	)		145,266
Less net income attributable to non-controlling interests		233				2			235
Net income attributable to stapled unitholders	$	145,033		2		(4	)	$	145,031

78 Granite REIT 2013

Statement of Cash Flows	Year ended December 31, 2013
	Granite REIT			Granite GP		Eliminations/ Adjustments		Granite REIT and Granite GP Combined
OPERATING ACTIVITIES
Net income	$	145,266		2		(2	)	$	145,266
Items not involving current cash flows		(16,516	)	(2	)	2			(16,516	)
Current income tax expense		10,490							10,490
Income taxes paid		(14,525	)						(14,525	)
Interest expense		19,945							19,945
Interest paid		(17,059	)						(17,059	)
Changes in working capital balances		293							293
Cash provided by operating activities		127,894							127,894
INVESTING ACTIVITIES
Business acquisitions (net of cash acquired of $375)		(233,363	)						(233,363	)
Investment property capital additions		(28,853	)						(28,853	)
Other investing activities		8,627							8,627
Cash used in investing activities		(253,589	)						(253,589	)
FINANCING ACTIVITIES
Distributions paid		(90,331	)						(90,331	)
Other financing activities		252,460							252,460
Cash provided by financing activities		162,129							162,129
Effect of exchange rate changes		8,013							8,013
Net increase in cash and cash equivalents during the year	$	44,447						$	44,447

23.  COMMITMENTS AND CONTINGENCIES

(a)

In the ordinary course of business activities, the Trust may become subject to litigation and other claims brought by, among others, tenants, suppliers and former employees. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not possible to accurately estimate the extent of potential costs and losses, if any, management believes, but can provide no assurance, that the ultimate resolution of such claims would not have a material adverse effect on the financial position of the Trust.

(b)

Under the terms of the plan of arrangement completed June 30, 2011 which eliminated Granite Co.'s dual class share structure, the Trust received an indemnity from Mr. Frank Stronach and his family (the "Stronach Shareholder") and certain related parties against all losses suffered by the Trust in relation to claims pertaining to the Trust's former racing and gaming business for the period prior to, on and after the effective date of the transfer of June 30, 2011. Accordingly, the Trust provided the Stronach Shareholder with the required disclosure notice under that indemnity referencing the racing and gaming-related litigation described below. Effective January 8, 2014, the Trust entered into a Confidential Settlement Agreement and Mutual Release (the "Settlement") that resolved all claims and potential

Granite REIT 2013 79

claims against Granite relating to this litigation. In accordance with the above-referenced indemnity, the Settlement did not require any payment from Granite.

On February 15, 2011, Power Plant Entertainment Casino Resorts Indiana, LLC, PPE Casino Resorts Maryland, LLC and The Cordish Company (the "Plaintiffs") sued, among other defendants, certain subsidiary entities and joint ventures of Granite Co., including The Maryland Jockey Club and certain of its subsidiaries (collectively, the "MJC Entities"), as well as Granite Co.'s former Chairman and Chief Executive Officer, Mr. Frank Stronach, in the Circuit Court for Baltimore City in Baltimore, Maryland. The claims asserted in the Plaintiffs' complaint against Granite Co., the MJC Entities and Mr. Stronach (the "Complaint") are alleged to have arisen from events that occurred in Maryland in connection with the referendum conducted in November 2010 concerning the award of a gaming license to one of the Plaintiffs to conduct alternative gaming at the Arundel Mills Mall. The Complaint asserted a number of claims against all defendants including, among other allegations, that Granite Co. and Mr. Stronach, along with other defendants, engaged in actions to defame the Plaintiffs by distributing allegedly false information concerning the Plaintiffs and their operations of a gaming facility in Indiana, Indianapolis Downs, LLC operating as Indiana Live. Plaintiffs' claims against Granite Co., the MJC Entities and Mr. Stronach were for alleged civil conspiracy, false light, invasion of privacy and defamation. The Complaint sought an award of damages against all defendants in the amount of U.S.$300.0 million in compensatory damages and U.S.$300.0 million in punitive damages.

(c)

At December 31, 2013, the Trust's contractual commitments related to construction and development projects amounted to approximately $8.2 million.

(d)

At December 31, 2013, the Trust had commitments on non-cancellable operating leases requiring future minimum annual rental payments as follows:

Not later than 1 year	$	433
Later than 1 year and not later than 5 years		1,197
Later than 5 years		394
	$	2,024

In addition, the Trust is committed to making annual payments under two ground leases for the land upon which two income-producing properties are situated of $0.1 million and $0.5 million to the years 2049 and 2096, respectively.

24.  SUBSEQUENT EVENTS

(a)

On January 2, 2014, the Trust sold an income-producing property located in Germany for gross proceeds of approximately $10.6 million. During the year ended December 31, 2013, the Trust incurred $0.2 million of costs related to this transaction, which are included in loss on sale of investment properties on the combined income statements.

(b)

On January 30, 2014, a subsidiary of Magna International Inc., agreed to a lease extension at its Thondorf facility in Graz, Austria. The lease expiry has been extended from December 31, 2017 to January 31, 2024. Thondorf is the Trust's largest property and for the year ended December 31, 2013, revenues associated with this property were approximately 10% of the Trust's total revenues. In connection with the extension the current rental rate will remain fixed for the balance of the term and Granite will pay a one-time tenant allowance in the amount of euro 25.0 million.

(c)

On February 28, 2014, the Trust sold an income-producing property located in the United States for gross proceeds of approximately $9.8 million.

(d)

On March 5, 2014, Granite entered into an asset purchase agreement with Magna for the sale to Magna of Granite's portfolio of Mexican properties for a purchase price of U.S. $105.0 million (note 5). The sale is subject to the satisfaction of several closing conditions, some of which involve action by government entities in Mexico.

80 Granite REIT 2013

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