EXHIBIT 2

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GRAPHIC

Audited Combined Financial Statements of
Granite Real Estate Investment Trust and
Granite REIT Inc. For the year ended December 31, 2016

Granite REIT  2016 43

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MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

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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 2016 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 2016
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 controls of high quality. 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, 2016 and based on the framework set forth inInternal Control  Integrated Framework (2013)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"), has 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 National 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 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 examination and their opinion 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.

|GRAPHIC                                   | GRAPHIC                                      
|----------------------------------------- | ---------------------------------------------
|Michael Forsayeth
Chief Executive Officer | Ilias Konstantopoulos
Chief Financial Officer

Toronto,
Canada,
March 1, 2017

44 Granite REIT  2016

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REPORT OF INDEPENDENT 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. and subsidiaries (collectively, the "Trust"), which comprise the
combined balance sheets as at December 31, 2016 and December 31, 2015, and the combined statements of income, combined statements of comprehensive income, combined statements of
unitholders' equity, and combined statements of cash flows for the years then ended December 31, 2016, and a summary of significant accounting policies and other explanatory information.

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, 2016 and
December 31, 2015, and their financial performance and their cash flows for the years then ended December 31, 2016 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, 2016, based on the criteria established inInternal Control  Integrated Framework
(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2017 expressed an unqualified opinion on the Trust's
internal control over financial reporting.

LOGO

Chartered
Professional Accountants
Licensed Public Accountants
March 1, 2017
Toronto, Canada

Granite REIT  2016 45

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REPORT OF INDEPENDENT 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 internal control over financial reporting of Granite Real Estate Investment Trust and Granite REIT Inc. and subsidiaries (collectively, the "Trust") as of
December 31, 2016, based on the criteria established inInternal Control  Integrated Framework (2013)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, 2016, based on the criteria established in Internal Control  Integrated
Framework (2013)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 as of and for the year ended December 31, 2016 of the Trust and our report dated March 1, 2017 expressed an unqualified / unmodified opinion on those financial
statements

LOGO

Chartered
Professional Accountants
Licensed Public Accountants
March 1, 2017
Toronto, Canada

46 Granite REIT  2016

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Combined Balance Sheets(Canadian dollars in thousands)

|As at December 31,                        |  | Note |     | 2016 |           | 2015
|----------------------------------------- |  | ---- | --- | ---- | --------- | ----
|ASSETS                                    |  |      |     |      |           |     
|Non-current assets:                       |  |      |     |      |           |     
|Investment properties                     |  | 3    |     | $    | 2,653,095 |     
|Deferred tax assets                       |  | 10   |     |      | 6,399     |     
|Fixed assets, net                         |  |      |     |      | 775       |     
|Other assets                              |  | 4    |     |      | 714       |     
|                                          |  |      |     |      |           |     
|                                          |  |      |     |      | 2,660,983 |     
|Current assets:                           |  |      |     |      |           |     
|Accounts receivable                       |  |      |     |      | 1,066     |     
|Income taxes receivable                   |  | 10   |     |      | 381       |     
|Prepaid expenses and other                |  | 16   | (a) |      | 2,434     |     
|Restricted cash                           |  |      |     |      | 563       |     
|Cash and cash equivalents                 |  | 15   | (e) |      | 246,215   |     
|                                          |  |      |     |      |           |     
|Total assets                              |  |      |     | $    | 2,911,642 |     
|                                          |  |      |     |      |           |     
|LIABILITIES AND EQUITY                    |  |      |     |      |           |     
|Non-current liabilities:                  |  |      |     |      |           |     
|Unsecured debentures, net                 |  | 5    |     | $    | 646,768   |     
|Cross currency interest rate swaps        |  | 5    |     |      | 10,641    |     
|Secured long-term debt                    |  | 6    |     |      |          |     
|Deferred tax liabilities                  |  | 10   |     |      | 238,251   |     
|Other non-current liabilities             |  | 7    |     |      | 7,777     |     
|                                          |  |      |     |      |           |     
|                                          |  |      |     |      | 903,437   |     
|Current liabilities:                      |  |      |     |      |           |     
|Deferred revenue                          |  |      |     |      | 5,489     |     
|Bank indebtedness                         |  | 8    |     |      |          |     
|Current portion of secured long-term debt |  | 6    |     |      |          |     
|Accounts payable and accrued liabilities  |  | 9    |     |      | 31,465    |     
|Distributions payable                     |  | 12   |     |      | 10,226    |     
|Income taxes payable                      |  | 10   |     |      | 11,289    |     
|                                          |  |      |     |      |           |     
|Total liabilities                         |  |      |     |      | 961,906   |     
|                                          |  |      |     |      |           |     
|Equity:                                   |  |      |     |      |           |     
|Stapled unitholders' equity               |  | 11   |     |      | 1,948,207 |     
|Non-controlling interests                 |  | 11   |     |      | 1,529     |     
|                                          |  |      |     |      |           |     
|Total equity                              |  |      |     |      | 1,949,736 |     
|                                          |  |      |     |      |           |     
|Total liabilities and equity              |  |      |     | $    | 2,911,642 |     
|                                          |  |      |     |      |           |     
|Commitments and contingencies (note 20)   |  |      |     |      |           |     
|See accompanying notes                    |  |      |     |      |           |     

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

Granite REIT  2016 47

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Combined Statements of Income(Canadian dollars in thousands)

|Years ended December 31,                        |  | Note |     | 2016 |          | 2015 |  
|----------------------------------------------- |  | ---- | --- | ---- | -------- | ---- | -
|Rental revenue and tenant recoveries            |  |      |     | $    | 223,401  |      | $
|Property operating costs                        |  | 13   | (a) |      | 7,638    |      |  
|General and administrative expenses             |  | 13   | (b) |      | 27,960   |      |  
|Depreciation and amortization                   |  |      |     |      | 707      |      |  
|Interest expense and other financing costs, net |  | 13   | (c) |      | 19,587   |      |  
|Early redemption costs of unsecured debentures  |  | 5    | (c) |      | 11,920   |      |  
|Foreign exchange gains, net                     |  |      |     |      | (374     | )    |  
|Fair value gains on investment properties, net  |  | 3    |     |      | (175,924 | )    |  
|Fair value losses on financial instruments      |  | 13   | (d) |      | 1,150    |      |  
|Loss on sale of investment properties           |  | 3    |     |      | 2,420    |      |  
|                                                |  |      |     |      |          |      |  
|Income before income taxes                      |  |      |     |      | 328,317  |      |  
|Income tax expense                              |  | 10   |     |      | 47,625   |      |  
|                                                |  |      |     |      |          |      |  
|Net income                                      |  |      |     | $    | 280,692  |      | $
|                                                |  |      |     |      |          |      |  
|Net income attributable to:                     |  |      |     |      |          |      |  
|Stapled unitholders                             |  |      |     | $    | 279,325  |      | $
|Non-controlling interests                       |  |      |     |      | 1,367    |      |  
|                                                |  |      |     |      |          |      |  
|                                                |  |      |     | $    | 280,692  |      | $
|                                                |  |      |     |      |          |      |  

See accompanying notes

48 Granite REIT  2016

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Combined Statements of Comprehensive Income(Canadian dollars in thousands)

|Years ended December 31,                                                                                                                     |                                                                                           | Note |   | 2016 |         | 2015    |  
|-------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ---- | - | ---- | ------- | ------- | -
|Net income                                                                                                                                   |                                                                                           |      |   | $    | 280,692 |         | $
|Other comprehensive income (loss):                                                                                                           |                                                                                           |      |   |      |         |         |  
|                                                                                                                                             | Foreign currency translation adjustment(1)                                                |      |   |      |         | (81,689 | )
|                                                                                                                                             | Fair value gain (loss) on cross currency interest rate swaps(1)                           |      | 5 | (d)  |         | 13,162  |  
|                                                                                                                                             | Net foreign exchange gain (loss) on net investment hedge, includes income taxes of nil(1) |      |   |      |         | 1,451   |  
|                                                                                                                                             |                                                                                           |      |   |      |         |         |  
|Total other comprehensive income (loss)                                                                                                      |                                                                                           |      |   |      | (67,076 | )       |  
|                                                                                                                                             |                                                                                           |      |   |      |         |         |  
|Comprehensive income                                                                                                                         |                                                                                           |      |   | $    | 213,616 |         | $
|                                                                                                                                             |                                                                                           |      |   |      |         |         |  
|(1) Items that may be reclassified subsequently to net income if items are terminated or no longer assessed as effective hedges (note 2(g)). |                                                                                          
|Comprehensive income attributable to:                                                                                                        |                                                                                           |      |   |      |         |         |  
|Stapled unitholders                                                                                                                          |                                                                                           |      |   | $    | 212,559 |         | $
|Non-controlling interests                                                                                                                    |                                                                                           |      |   |      | 1,057   |         |  
|                                                                                                                                             |                                                                                           |      |   |      |         |         |  
|Comprehensive income                                                                                                                         |                                                                                           |      |   | $    | 213,616 |         | $
|                                                                                                                                             |                                                                                           |      |   |      |         |         |  

See accompanying notes

Granite REIT  2016 49

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

|Year ended December 31, 2016                         |  | Number
of
Units |     | Stapled Units |           | Contributed
surplus |   | Deficit |  | Accumulated
other
comprehensive
income (loss) |          | Stapled
Unitholders'
Equity |   | Non-
controlling
interests |   | Equity |          
|---------------------------------------------------- |  | --------------- | --- | ------------- | --------- | ------------------- | - | ------- |  | --------------------------------------------- | -------- | --------------------------- | - | -------------------------- | - | ------ | ---------
|As at January 1, 2016                                |  | 47,017          |     | $             | 2,124,198 |                     | $ | 61,425  |  | $                                             | (557,092 | )                           | $ | 220,500                    |   | $      | 1,849,031
|Net income                                           |  |                |     |               |          |                     |   |        |  |                                               | 279,325  |                             |   |                           |   |        | 279,325  
|Other comprehensive loss                             |  |                |     |               |          |                     |   |        |  |                                               |         |                             |   | (66,766                    | ) |        | (66,766  
|Distributions                                        |  |                |     |               |          |                     |   |        |  |                                               | (114,293 | )                           |   |                           |   |        | (114,293 
|Acquisition of non-controlling interests (note 11)   |  |                |     |               |          |                     |   |        |  |                                               | (3,270   | )                           |   |                           |   |        | (3,270   
|Units issued on exercise of stapled unit options     |  | 50              |     |               | 2,084     |                     |   |        |  |                                               |         |                             |   |                           |   |        | 2,084    
|Units issued on settlement of deferred stapled units |  | 56              |     |               | 2,097     |                     |   |        |  |                                               |         |                             |   |                           |   |        | 2,097    
|Units redeemed                                       |  |                | (1) |               | (1        | )                   |   |        |  |                                               |         |                             |   |                           |   |        | (1       
|                                                     |  |                 |     |               |           |                     |   |         |  |                                               |          |                             |   |                            |   |        |          
|As at December 31, 2016                              |  | 47,123          |     | $             | 2,128,378 |                     | $ | 61,425  |  | $                                             | (395,330 | )                           | $ | 153,734                    |   | $      | 1,948,207
|                                                     |  |                 |     |               |           |                     |   |         |  |                                               |          |                             |   |                            |   |        |          

|
|

|Year ended December 31, 2015                         |  | Number
of
Units |     | Stapled Units |           | Contributed
surplus |   | Deficit |  | Accumulated
other
comprehensive
income |          | Stapled
Unitholders'
Equity |   | Non-
controlling
interests |  | Equity |          
|---------------------------------------------------- |  | --------------- | --- | ------------- | --------- | ------------------- | - | ------- |  | -------------------------------------- | -------- | --------------------------- | - | -------------------------- |  | ------ | ---------
|As at January 1, 2015                                |  | 47,017          |     | $             | 2,124,202 |                     | $ | 61,425  |  | $                                      | (642,099 | )                           | $ | 86,457                     |  | $      | 1,629,985
|Net income                                           |  |                |     |               |          |                     |   |        |  |                                        | 193,334  |                             |   |                           |  |        | 193,334  
|Other comprehensive income                           |  |                |     |               |          |                     |   |        |  |                                        |         |                             |   | 134,043                    |  |        | 134,043  
|Distributions                                        |  |                |     |               |          |                     |   |        |  |                                        | (108,327 | )                           |   |                           |  |        | (108,327 
|Contributions from non-controlling interests         |  |                |     |               |          |                     |   |        |  |                                        |         |                             |   |                           |  |        |         
|Units issued on settlement of deferred stapled units |  |                | (1) |               | 1         |                     |   |        |  |                                        |         |                             |   |                           |  |        | 1        
|Units redeemed                                       |  |                | (2) |               | (5        | )                   |   |        |  |                                        |         |                             |   |                           |  |        | (5       
|                                                     |  |                 |     |               |           |                     |   |         |  |                                        |          |                             |   |                            |  |        |          
|As at December 31, 2015                              |  | 47,017          |     | $             | 2,124,198 |                     | $ | 61,425  |  | $                                      | (557,092 | )                           | $ | 220,500                    |  | $      | 1,849,031
|                                                     |  |                 |     |               |           |                     |   |         |  |                                        |          |                             |   |                            |  |        |          

See accompanying notes

50 Granite REIT  2016

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Combined Statements of Cash Flows(Canadian dollars in thousands)

|Years ended December 31,                                       |                                                | Note                          |     | 2016 |          | 2015   |        
|-------------------------------------------------------------- | ---------------------------------------------- | ----------------------------- | --- | ---- | -------- | ------ | -------
|OPERATING ACTIVITIES                                           |                                                |                               |     |      |          |        |        
|Net income                                                     |                                                |                               |     | $    | 280,692  |        | $      
|Items not involving current cash flows                         |                                                | 15                            | (a) |      | (121,864 | )      |        
|Leasing commissions paid                                       |                                                |                               |     |      | (2,485   | )      |        
|Tenant allowances paid                                         |                                                |                               |     |      | (1,174   | )      |        
|Current income tax expense                                     |                                                | 10                            | (a) |      | 6,881    |        |        
|Income taxes paid                                              |                                                |                               |     |      | (225     | )      |        
|Interest expense                                               |                                                |                               |     |      | 17,792   |        |        
|Interest paid                                                  |                                                |                               |     |      | (19,585  | )      |        
|Changes in working capital balances                            |                                                | 15                            | (b) |      | (41      | )      |        
|                                                               |                                                |                               |     |      |          |        |        
|Cash provided by operating activities                          |                                                |                               |     |      | 159,991  |        |        
|                                                               |                                                |                               |     |      |          |        |        
|INVESTING ACTIVITIES                                           |                                                |                               |     |      |          |        |        
|Investment properties:                                         |                                                |                               |     |      |          |        |        
|                                                               | Proceeds on disposal, net                      |                               | 3   |      |          | 39,594 |        
|                                                               | Capital expenditures                           |                               |     |      |          |        |        
|                                                               |                                                |  Maintenance or improvements |     |      |          |        | (2,063 
|                                                               |                                                |  Developments or expansions  |     |      |          |        | (17,221
|                                                               | Restricted cash used for property improvements |                               |     |      |          |       |        
|                                                               | Acquisition of development land                |                               | 3   |      |          |       |        
|Fixed asset additions                                          |                                                |                               |     |      | (225     | )      |        
|Payment of contingent consideration                            |                                                | 7                             |     |      | (8,802   | )      |        
|Decrease (increase) in other assets                            |                                                |                               |     |      | 496      |        |        
|Cash used in investing activities from discontinued operations |                                                | 15                            | (d) |      |         |        |        
|                                                               |                                                |                               |     |      |          |        |        
|Cash provided by (used in) investing activities                |                                                |                               |     |      | 11,779   |        |        
|                                                               |                                                |                               |     |      |          |        |        
|FINANCING ACTIVITIES                                           |                                                |                               |     |      |          |        |        
|Distributions paid                                             |                                                |                               |     |      | (113,095 | )      |        
|Proceeds from unsecured debentures                             |                                                | 5                             | (b) |      | 400,008  |        |        
|Repayment of unsecured debentures                              |                                                | 5                             | (c) |      | (200,000 | )      |        
|Proceeds from secured long-term debt                           |                                                |                               |     |      | 11,820   |        |        
|Repayments of secured long-term debt                           |                                                | 6                             |     |      | (106,662 | )      |        
|Proceeds from bank indebtedness                                |                                                |                               |     |      | 96,595   |        |        
|Repayments of bank indebtedness                                |                                                |                               |     |      | (114,521 | )      |        
|Financing costs paid                                           |                                                |                               |     |      | (1,505   | )      |        
|Termination of cross currency interest rate swap               |                                                | 5                             | (d) |      | (1,657   | )      |        
|Contributions from non-controlling interests                   |                                                |                               |     |      |         |        |        
|Acquisition of non-controlling interests                       |                                                | 11                            |     |      | (12,093  | )      |        
|Distributions to non-controlling interests                     |                                                |                               |     |      | (461     | )      |        
|Redemption of stapled units                                    |                                                |                               |     |      | (1       | )      |        
|Proceeds from units issued                                     |                                                |                               |     |      | 1,611    |        |        
|                                                               |                                                |                               |     |      |          |        |        
|Cash used in financing activities                              |                                                |                               |     |      | (39,961  | )      |        
|                                                               |                                                |                               |     |      |          |        |        
|Effect of exchange rate changes on cash and cash equivalents   |                                                |                               |     |      | (4,749   | )      |        
|                                                               |                                                |                               |     |      |          |        |        
|Net increase in cash and cash equivalents during the year      |                                                |                               |     |      | 127,060  |        |        
|Cash and cash equivalents, beginning of year                   |                                                |                               |     |      | 119,155  |        |        
|                                                               |                                                |                               |     |      |          |        |        
|Cash and cash equivalents, end of year                         |                                                | 15                            | (e) | $    | 246,215  |        | $      
|                                                               |                                                |                               |     |      |          |        |        

See accompanying notes

Granite REIT  2016 51

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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 theBusiness 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 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. The stapled units trade on the Toronto Stock Exchange
and on the New York Stock Exchange. 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'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 1, 2017.

2.  SIGNIFICANT ACCOUNTING POLICIES

---

The
accounting policies described below have been applied consistently to all periods presented in these combined financial statements.





52 Granite REIT  2016

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Granite REIT  2016 53

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54 Granite REIT  2016

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Granite REIT  2016 55

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56 Granite REIT  2016

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Granite REIT  2016 57

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58 Granite REIT  2016

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Granite REIT  2016 59

---







3.  INVESTMENT PROPERTIES

---

|As at December 31,                    |  | 2016 |           | 2015
|------------------------------------- |  | ---- | --------- | ----
|Income-Producing Properties           |  | $    | 2,646,292 |     
|Properties and Land Under Development |  |      |          |     
|Land Held For Development             |  |      | 6,803     |     
|                                      |  |      |           |     
|                                      |  | $    | 2,653,095 |     
|                                      |  |      |           |     

Changes
in investment properties are shown in the following table:

|Years ended December 31,           |  | 2016 |           | 2015 |  
|---------------------------------- |  | ---- | --------- | ---- | -
|
|Balance, beginning of year         |  | $    | 2,576,562 |      | $
|Additions                          |  |      |           |      |  
| Capital expenditures:            |  |      |           |      |  
|Maintenance or improvements        |  |      | 2,089     |      |  
|Developments or expansions         |  |      | 8,224     |      |  
| Acquisitions                     |  |      |          |      |  
| Land under development           |  |      |          |      |  
| Completed projects               |  |      | 13,685    |      |  
| Leasing commissions              |  |      | 2,058     |      |  
| Tenant allowances                |  |      | 1,458     |      |  
|Fair value gains (losses), net     |  |      | 175,924   |      |  
|Foreign currency translation, net  |  |      | (89,096   | )    |  
|Disposals                          |  |      | (42,014   | )    |  
|Amortization of straight-line rent |  |      | 371       |      |  
|Amortization of tenant allowances  |  |      | (5,229    | )    |  
|Other changes                      |  |      | 2,260     |      |  
|                                   |  |      |           |      |  
|Balance, end of year               |  | $    | 2,646,292 |      | $
|                                   |  |      |           |      |  

During the year ended December 31, 2016, the Trust disposed of seven income-producing properties located in the United States, Austria and Germany
for aggregate gross proceeds of $42.0 million. During the year ended December 31, 2015, the Trust disposed of six income-producing properties located in North America

60 Granite REIT  2016

---



and
Germany for aggregate gross proceeds of $16.3 million. For the year ended December 31, 2016, the Trust incurred a $2.4 million
(2015  $1.4 million) loss on disposal due to the associated selling costs.

On
May 26, 2015, the Trust acquired 28 acres of development land in Poland for a purchase price of $6.0 million.

The
fair value gains during the years ended December 31, 2016 and 2015, excluding properties sold in the year, were $170.7 million and $72.0 million, respectively.

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 renewals 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. The fair
values of properties and land under development 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 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 uses such appraisals as data points, together with other external market information accumulated by management, in arriving at its own conclusions on values. Management uses
valuation assumptions such as discount rates, terminal capitalization rates and market rental rates applied in external appraisals or sourced from valuation experts; however, the Trust also uses its
historical renewal experience with tenants, its direct knowledge of the specialized nature of Granite's portfolio and tenant profile and the actual condition of the properties in making business
judgments about lease renewal probabilities, renewal rents and capital expenditures. There has been no change in the valuation methodology during the year.

The
Trust's internal valuation team consists of individuals knowledgeable and experienced in 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 discount and terminal capitalization rates as provided by independent real
estate appraisal firms with representation and expertise in the various jurisdictions in which Granite's investment properties are located. The resulting changes in fair values are analyzed at each
reporting date with the internal valuation team presenting 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 |  
|---------------- |  | ------------- | --------- | ---------------------------- | -
|
|+50 basis points |  | $             | 2,562,169 |                              | $
|+25 basis points |  |               | 2,606,900 |                              |  
|Base rate        |  |               | 2,653,095 |                              |  
|-25 basis points |  |               | 2,699,516 |                              |  
|-50 basis points |  |               | 2,747,459 |                              |  

Granite REIT  2016 61

---



The
key valuation metrics for income-producing properties by country are set out below:

|As at December 31,           |  | 2016   |  | 2015 
|---------------------------- |  | ------ |  | -----
|
|Canada                       |  |        |  |      
|Discount rate                |  | 8.25%  |  | 6.50%
|Terminal capitalization rate |  | 8.00%  |  | 5.75%
|United States                |  |        |  |      
|Discount rate                |  | 10.75% |  | 6.25%
|Terminal capitalization rate |  | 11.25% |  | 5.75%
|Germany                      |  |        |  |      
|Discount rate                |  | 9.00%  |  | 7.00%
|Terminal capitalization rate |  | 9.50%  |  | 5.75%
|Austria                      |  |        |  |      
|Discount rate                |  | 9.00%  |  | 8.00%
|Terminal capitalization rate |  | 9.50%  |  | 8.50%
|Netherlands                  |  |        |  |      
|Discount rate                |  | 7.50%  |  | 6.85%
|Terminal capitalization rate |  | 7.30%  |  | 7.15%
|Other                        |  |        |  |      
|Discount rate                |  | 10.00% |  | 9.00%
|Terminal capitalization rate |  | 10.50% |  | 7.35%
|Total                        |  |        |  |      
|Discount rate                |  | 10.75% |  | 6.25%
|Terminal capitalization rate |  | 11.25% |  | 5.75%

Included in investment properties is $11.3 million (December 31, 2015  $11.6 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 20).

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

Not later than 1 year

$
217,219Later than 1 year and not later than 5 years


713,330Later than 5 years


795,221$
1,725,770


62 Granite REIT  2016

---



4.  OTHER ASSETS

---

Other
assets consist of:

|As at December 31,       |  | 2016 |     | 2015
|------------------------ |  | ---- | --- | ----
|Deferred financing costs |  | $    | 184 |     
|Long-term receivables    |  |      | 530 |     
|Interest rate caps       |  |      |    |     
|Deposits                 |  |      |    |     
|                         |  |      |     |     
|                         |  | $    | 714 |     
|                         |  |      |     |     

5.  UNSECURED DEBENTURES, NET

---

Unsecured
debentures, net, consist of:

|                  |  |                   |  | 2016 |         | 2015
|----------------- |  | ----------------- |  | ---- | ------- | ----
|
|3.788% Debentures |  | July 5, 2021      |  | $    | 248,979 |     
|3.873% Debentures |  | November 30, 2023 |  |      | 397,789 |     
|4.613% Debentures |  | October 2, 2018   |  |      |        |     
|                  |  |                   |  |      |         |     
|                  |  |                   |  | $    | 646,768 |     
|                  |  |                   |  |      |         |     





Granite REIT  2016 63

---









As at December 31,

2016

2015Financial liability2021 Cross Currency Interest Rate Swap  fair value

$
443

$
9,8932023 Cross Currency Interest Rate Swap  fair value


10,198


2018 Cross Currency Interest Rate Swap  fair value





15,359$
10,641

$
25,252




64 Granite REIT  2016

---





6.  SECURED LONG-TERM DEBT

---

Secured
long-term debt consists of:

|As at December 31,        |  |               |  |               |  | 2016 |   | 2015
|------------------------- |  | ------------- |  | ------------- |  | ---- | - | ----
|
|Mortgage payable          |  | June 10, 2017 |  | LIBOR + 2.50% |  | $    |  |     
|Mortgage payable          |  | May 10, 2018  |  | LIBOR + 2.50% |  |      |  |     
|Construction loan         |  | July 25, 2017 |  | LIBOR + 2.25% |  |      |  |     
|Construction loan         |  | June 20, 2017 |  | LIBOR + 2.25% |  |      |  |     
|                          |  |               |  |               |  |      |   |     
|                          |  |               |  |               |  | $    |  |     
|Less: due within one year |  |               |  |               |  |      |  |     
|                          |  |               |  |               |  |      |   |     
|                          |  |               |  |               |  | $    |  |     
|                          |  |               |  |               |  |      |   |     

Concurrent with the acquisition of the non-controlling interests in November 2016 (note 11), the outstanding mortgages and construction loans
totaling $105.4 million (US$ 78.5 million) were repaid.

7.  OTHER NON-CURRENT LIABILITIES

---

Other
non-current liabilities consist of:

As at December 31,

2016

2015Tenant allowance payable

$
7,777

$
7,598Contingent consideration





5,286$
7,777

$
12,884


The
tenant allowance payable of €6.0 million is due in January 2018 and relates to a lease extension at the Eurostar facility in Graz, Austria. This payable of
€6.0 million was discounted and is being accreted to its face value through a charge to interest expense.

Contingent
consideration was recognized in connection with acquisitions completed in 2013. The fair value of the contingent consideration was estimated using an income approach and was dependent upon
achieving certain predetermined returns over a five year period. This amount was dependent upon a number of assumptions, including the fair value of the properties acquired, which were subject to
change over the years to the date of payment. During 2016, with the properties fully leased and given recent increases in the fair value of the properties acquired, the contingent consideration
obligation was increased by $3.5 million to reflect these changes in the valuation assumptions (note 13(d)). For a description of the valuation process used to determine the fair value
of the properties, refer to note 3. Concurrent with the acquisition of the non-controlling interests in November 2016 (note 11), the contingent consideration recognized of
$8.8 million (US$ 6.6 million) was paid.

Granite REIT  2016 65

---



8.  BANK INDEBTEDNESS

---

Effective
December 11, 2014, Granite LP entered into an amended and restated agreement for an unsecured senior revolving credit facility in the amount of $250.0 million that is
available by way of Canadian dollar, U.S. dollar or euro denominated loans or letters of credit (the "Credit Facility"). Subsequent to December 31, 2016, Granite LP, with
the agreement of its lenders, extended the maturity date by one year to February 1, 2019 from February 1, 2018. The Credit Facility provides Granite LP with the ability to
increase the amount of the commitment by an additional aggregate principal amount of up to $50.0 million with the consent of the participating lenders. The Credit Facility is guaranteed by
Granite REIT and Granite GP. 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,
Granite LP would be subject to interest at a rate per annum equal to the base rate (i.e. LIBOR, Canadian prime business rate or euro currency rate) depending on the currency
Granite LP borrows in plus an applicable margin of up to 1.45%. At December 31, 2016, Granite LP had $0.2 million
(2015  $0.6 million) in letters of credit issued against the Credit Facility and no amounts drawn
(2015  $19.4 million (US$ 14.0 million)) from the Credit Facility.

9.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

---

Accounts
payable and accrued liabilities consist of:

|As at December 31,                               |  | 2016 |        | 2015
|------------------------------------------------ |  | ---- | ------ | ----
|Accounts payable                                 |  | $    | 5,660  |     
|Accrued salaries, incentives and severance       |  |      | 5,161  |     
|Accrued interest payable                         |  |      | 5,201  |     
|Accrued construction payable                     |  |      | 1,922  |     
|Accrued professional fees                        |  |      | 2,283  |     
|Accrued employee unit-based compensation         |  |      | 1,474  |     
|Accrued trustee/director unit-based compensation |  |      | 6,568  |     
|Other accrued liabilities                        |  |      | 3,196  |     
|                                                 |  |      |        |     
|                                                 |  | $    | 31,465 |     
|                                                 |  |      |        |     

10.  INCOME TAXES

---

Years ended December 31,

2016

2015Current income tax:Current taxes

$
7,873

$
5,914Current taxes referring to previous periods


(1,686
)

(2,053
)Withholding taxes and other


694


6,881


3,861Deferred income tax:Origination and reversal of temporary differences


39,774


33,242Impact of changes in tax rates


(55
)

Withholding taxes on profits of subsidiaries


120


(396
)Other


905


(551
)40,744


32,295Income tax expense

$
47,625

$
36,156


66 Granite REIT  2016

---





Years ended December 31,

2016

2015Income before income taxes

$
328,317

$
231,696Expected income taxes at the Canadian statutory tax rate of 26.5% (2015  26.5%)

$
87,004

$
61,399Income distributed and taxable to unitholders


(53,039
)

(26,538
)Net foreign rate differentials


9,152


3,082Net change in provisions for uncertain tax positions


825


(396
)Net permanent differences


2,229


(1,025
)Net effect of change in tax rates


(55
)

Withholding taxes and other items


1,509


(366
)Income tax expense

$
47,625

$
36,156


|
|

As at December 31,

2016

2015Deferred tax assets:Investment properties

$
1,249

$
1,439Eligible capital expenditures


2,822


3,035Other


2,328


3,302Total deferred tax assets


6,399


7,776Deferred tax liabilities:Investment properties


237,159


207,494Withholding tax on undistributed subsidiary profits


1,092


1,029Other





(557
)Total deferred tax liabilities

$
238,251

$
207,966


|
|

Years ended December 31,

2016

2015Balance, beginning of year

$
200,190

$
148,502Deferred tax expense recognized in net income


40,744


32,295Foreign currency translation of deferred tax balances


(9,082
)

19,393$
231,852

$
200,190


Granite REIT  2016 67

---





|
|

As at December 31,

2016

2015Unrecognized tax benefits balance, beginning of year

$
11,883

$
13,882Decreases for tax positions of prior years


(3,066
)

(4,041
)Increases for tax positions of current year


1,979


1,188Foreign currency impact


(653
)

854Unrecognized tax benefits balance, end of year

$
10,143

$
11,883




Major JurisdictionsCanada

2012 through 2016United States

2013 through 2016Mexico

2010 through 2016Austria

2013 through 2016Germany

2012 through 2016Netherlands

2013 through 2016




11.  EQUITY

---

Non-Controlling Interests

On
November 17, 2016, the Trust acquired the remaining 10% interest in DGI LS, LLC, DGI Berks, LP and DGI Shepherdsville, LLC as well as the remaining 5% interest in DGI
Portland, LLC for cash consideration totaling $12.1 million (US$ 9.0 million) which resulted in a 100% ownership interest in each of these subsidiaries.

68 Granite REIT  2016

---



A
change in the Trust's ownership interest in a subsidiary that does not result in a loss of control is recorded as an equity transaction. As a result of the above mentioned acquisitions,
$3.3 million (US$ 2.4 million) was recorded in Deficit, representing the difference between the total consideration paid of $12.1 million (US$ 9.0 million)
and the $8.8 million (US$ 6.6 million) carrying value of the non-controlling interests which were derecognized on November 17, 2016.

Stapled Unitholders' Equity





2016

2015Number
(000s)

Weighted
Average
Exercise
Price

Number
(000s)

Weighted
Average
Exercise
PriceOptions outstanding, January 1

50

$
32.21

50

$
32.21Exercised

(50
)

32.21




Options outstanding and exercisable, December 31



$


50
(1)
$
32.21




Granite REIT  2016 69

---





2016

2015Number
(000s)

Weighted
Average
Grant Date
Fair Value

Number
(000s)

Weighted
Average
Grant Date
Fair ValueDSUs outstanding, January 1

135

$
35.51

110

$
34.45Granted

28


40.27

25


40.20Settled

(16
)

44.44




DSUs outstanding, December 31

147

$
35.43

135

$
35.51




2016

2015Number
(000s)

Weighted
Average
Grant Date
Fair Value

Number
(000s)

Weighted
Average
Grant Date
Fair ValueStapled units outstanding, January 1

72

$
41.03

97

$
38.19New grants

67


40.61

34


42.40Forfeited(1)




37.33

(59
)

37.16Settled(2)

(57
)

38.24




39.01Stapled units outstanding, December 31

82

$
42.34

72

$
41.03




70 Granite REIT  2016

---





Years ended December 31,

2016

2015DSP for trustees/directors

$
2,078

$
572Stapled Unit Plan for employees


1,330


(648
)Option Plan


274


(13
)Unit-based compensation expense (recovery)

$
3,682

$
(89
)Adjustments to fair value included in the above

$
1,361

$
(815
)






As at December 31,

2016

2015Foreign currency translation gains on investments in subsidiaries, net of related hedging activities and non-controlling interests(1)

$
167,684

$
247,612Losses on derivatives designated as net investment hedges


(13,950
)

(27,112
)$
153,734

$
220,500




12.  DISTRIBUTIONS TO STAPLED UNITHOLDERS

---

Total distributions declared to stapled unitholders in the year ended December 31, 2016 were $114.3 million
(2015  $108.3 million) or $2.43 per stapled unit (2015  $2.30 per stapled unit). Distributions payable at
December 31, 2016 of $10.2 million, representing the December 2016 distribution, were paid on January 16, 2017. The distribution declared in January 2017 in the
amount of $10.2 million was paid on February 15, 2017 and the distribution declared in February 2017 will be paid on March 15, 2017.

Granite REIT  2016 71

---



13.  COSTS AND EXPENSES (INCOME)

---

Years ended December 31,

2016

2015Non-recoverable from tenants:Property taxes and utilities

$
747

$
794Legal


348


827Consulting


482


477Environmental and appraisals


477


403Repairs and maintenance


465


782Ground rents


628


603Other


660


5113,807


4,397Recoverable from tenants:Property taxes and utilities


2,209


1,516Repairs and maintenance


531


355Property management fees


592


478Other


499


3163,831


2,665Property operating costs

$
7,638

$
7,062


|
|

Years ended December 31,

2016

2015Salaries, benefits and severance

$
13,332

$
16,793Audit, legal and consulting


4,807


4,964Trustee/director fees and related expenses


1,673


2,547Unit-based compensation including distributions and revaluations


2,921


(819
)Other


5,227


4,832$
27,960

$
28,317


Years ended December 31,

2016

2015Interest and amortized issuance costs relating to debentures

$
14,800

$
14,333Interest on mortgages payable and construction loans


3,057


2,493Amortization of deferred financing costs


193


196Other interest and accretion charges


1,946


2,09519,996


19,117Capitalized interest


(91
)

(85
)Interest income


(318
)

(286
)$
19,587

$
18,746


72 Granite REIT  2016

---



Years ended December 31,

2016

2015Foreign exchange forward contracts, net

$
(2,394
)
$
1,445Interest rate caps


79


315Contingent consideration (note 7)


3,465


$
1,150

$
1,760


14.  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, |  | 2016 |         | 2015
|------------------------ |  | ---- | ------- | ----
|Canada                   |  | $    | 62,733  |     
|United States            |  |      | 63,515  |     
|Austria                  |  |      | 60,285  |     
|Germany                  |  |      | 23,091  |     
|Netherlands              |  |      | 9,515   |     
|Other Europe             |  |      | 4,262   |     
|                         |  |      |         |     
|                         |  | $    | 223,401 |     
|                         |  |      |         |     

For
the year ended December 31, 2016, revenues from Magna were approximately 78% (2015  81%) of the Trust's total revenues.

Investment properties

|As at December 31, |  | 2016 |           | 2015
|------------------ |  | ---- | --------- | ----
|Canada             |  | $    | 763,701   |     
|United States      |  |      | 779,196   |     
|Austria            |  |      | 699,001   |     
|Germany            |  |      | 242,467   |     
|Netherlands        |  |      | 118,123   |     
|Other Europe       |  |      | 50,607    |     
|                   |  |      |           |     
|                   |  | $    | 2,653,095 |     
|                   |  |      |           |     

Granite REIT  2016 73

---



15.  DETAILS OF CASH FROM OPERATING ACTIVITIES

---

Years ended December 31,

2016

2015Straight-line rent adjustment

$
4,865

$
5,456Unit-based compensation expense (recovery)


3,682


(89
)Fair value gains on investment properties


(175,924
)

(73,082
)Depreciation and amortization


707


720Fair value losses on financial instruments


1,150


1,760Loss on sale of investment properties


2,420


1,413Amortization of issuance costs relating to debentures


1,749


841Amortization of deferred financing costs


193


196Deferred income taxes


40,744


32,295Other


(1,450
)

(1,680
)$
(121,864
)
$
(32,170
)


Years ended December 31,

2016

2015Accounts receivable

$
2,723

$
(1,458
)Prepaid expenses and other


333


92Accounts payable and accrued liabilities


(2,448
)

1,438Deferred revenue


(1,376
)

1,293Restricted cash


727


(700
)$
(41
)
$
665






Years ended December 31,

2016

2015Cash

$
109,414

$
64,473Short-term deposits


136,801


54,682$
246,215

$
119,155


74 Granite REIT  2016

---



16.  FAIR VALUE AND RISK MANAGEMENT

---



Fair value
through
profit
or loss

Loans and receivables /
other financial liabilities

Total

TotalMeasurement basis
Fair value

Amortized cost

Fair value

Carrying Value

Fair ValueFinancial assetsOther assets
$


$
530
(1)
$
530

$
530

$
530Accounts receivable




1,066


1,066


1,066


1,066Prepaid expenses and other

1,486
(2)







1,486


1,486Restricted cash




563


563


563


563Cash and cash equivalents




246,215


246,215


246,215


246,215$
1,486

$
248,374

$
248,374

$
249,860

$
249,860Financial liabilitiesUnsecured debentures, net
$


$
646,768

$
658,325

$
646,768

$
658,325Cross currency interest rate swaps

10,641








10,641


10,641Other non-current liability

7,777








7,777


7,777Accounts payable and accrued liabilities




31,465


31,465


31,465


31,465Distributions payable




10,226


10,226


10,226


10,226$
18,418

$
688,459

$
700,016

$
706,877

$
718,434




Granite REIT  2016 75

---





Fair value
through
profit
or loss

Loans and receivables /
other financial liabilitiesTotalTotalAmortized cost



Carrying ValueMeasurement basis
Fair value

Fair value

Fair ValueFinancial assetsOther assets
$
90
(3)
$
589
(4)
$
589

$
679

$
679Accounts receivable




3,849


3,849


3,849


3,849Prepaid expenses and other

24
(5)







24


24Restricted cash




1,336


1,336


1,336


1,336Cash and cash equivalents




119,155


119,155


119,155


119,155$
114

$
124,929

$
124,929

$
125,043

$
125,043Financial liabilitiesUnsecured debentures, net
$


$
447,657

$
467,255

$
447,657

$
467,255Cross currency interest rate swaps

25,252








25,252


25,252Secured long-term debt




96,991


96,991


96,991


96,991Other non-current liabilities

12,884








12,884


12,884Bank indebtedness




19,376


19,376


19,376


19,376Accounts payable and accrued liabilities

932
(6)

38,083


38,083


39,015


39,015Distributions payable




9,027


9,027


9,027


9,027$
39,068

$
611,134

$
630,732

$
650,202

$
669,800




76 Granite REIT  2016

---





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.




As at December 31, 2016

Level 1

Level 2

Level 3ASSETS AND LIABILITIES MEASURED OR DISCLOSED AT FAIR VALUEAssets measured at fair valueInvestment properties

$


$


$
2,653,095Foreign exchange forward contracts included in prepaid expenses and other





1,486


Liabilities measured or disclosed at fair valueUnsecured debentures, net


658,325





Cross currency interest rate swaps





10,641


Other non-current liability








7,777Net assets (liabilities) measured at fair value

$
(658,325
)
$
(9,155
)
$
2,645,318


|
|

As at December 31, 2015

Level 1

Level 2

Level 3ASSETS AND LIABILITIES MEASURED OR DISCLOSED AT FAIR VALUEAssets measured at fair valueInvestment properties

$


$


$
2,592,386Interest rate caps included in other assets





90


Foreign exchange forward contracts included in prepaid expenses and other





24


Liabilities measured or disclosed at fair valueUnsecured debentures, net


467,255





Cross currency interest rate swaps





25,252


Other non-current liabilities








12,884Secured long-term debt





96,991


Bank indebtedness





19,376


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





932


Net assets (liabilities) measured at fair value

$
(467,255
)
$
(142,437
)
$
2,579,502


Granite REIT  2016 77

---













78 Granite REIT  2016

---







(in thousands)



Payments due by yearAs at December 31, 2016Total

2017

2018

2019

2020

2021

ThereafterUnsecured debentures

$
650,000

$


$


$


$


$
250,000

$
400,000Cross currency interest rate swaps


10,641














443


10,198Interest payments(1):Unsecured debentures, net of cross currency interest rate swap savings


99,126


15,554


16,088


16,088


16,088


16,088


19,220Tenant allowance payable


8,501





8,501











Accounts payable and accrued liabilities


31,465


30,851


531


83








Distributions payable


10,226


10,226














$
809,959

$
56,631

$
25,120

$
16,171

$
16,088

$
266,531

$
429,418




17.  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,                 |  | 2016 |           | 2015
|---------------------------------- |  | ---- | --------- | ----
|Unsecured debentures, net          |  | $    | 646,768   |     
|Cross currency interest rate swaps |  |      | 10,641    |     
|Secured long-term debt             |  |      |          |     
|Bank indebtedness                  |  |      |          |     
|                                   |  |      |           |     
|Total debt                         |  |      | 657,409   |     
|Stapled unitholders' equity        |  |      | 1,948,207 |     
|                                   |  |      |           |     
|Total managed capital              |  | $    | 2,605,616 |     
|                                   |  |      |           |     

Granite REIT  2016 79

---



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:



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



At
December 31, 2016, the Trust's consolidated debt consists of the 2021 Debentures and the 2023 Debentures which have various financial covenants. These covenants are defined within the trust
indenture and include a total indebtedness ratio, an interest coverage ratio, an unencumbered asset ratio and a minimum equity threshold. The Trust monitors these provisions and covenants and was in
compliance with their respective requirements as at December 31, 2016.

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 2016, the Trust provided to its unitholders a monthly distribution of $0.192 per stapled unit for January and February, a monthly distribution of $0.203
per stapled unit from March to November and a monthly distribution of $0.217 per stapled unit for the month of December. The Board determined these distribution levels having considered, among other
factors, estimated 2016 and 2017 cash generated 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.

18.  RELATED PARTY TRANSACTIONS

---

For
the year ended December 31, 2016, key management personnel include the Trustees/Directors, the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer. For the
year ended December 31, 2015, key management personnel included the Trustees/Directors, the Interim Chief Executive Officer and Chief Financial Officer and the former Chief Executive Officer.
Information with respect to the Trustees'/Directors' fees is included in notes 11(b) and 13(b).The compensation paid or payable to the Trust's key management personnel as noted above for
services was as follows:

|Years ended December 31,                                                    |  | 2016 |       | 2015 |  
|--------------------------------------------------------------------------- |  | ---- | ----- | ---- | -
|Salaries, incentives, short-term benefits and severance                     |  | $    | 2,645 |      | $
|Unit-based compensation expense (recovery) including fair value adjustments |  |      | 761   |      |  
|                                                                            |  |      |       |      |  
|                                                                            |  | $    | 3,406 |      | $
|                                                                            |  |      |       |      |  

For the year ended December 31, 2015, salaries, incentives, short-term benefits and severance included $3.5 million of severance expense
associated with the departure of Granite's former Chief Executive Officer.

80 Granite REIT  2016

---



Accounts
payable and accrued liabilities at December 31, 2016 included $0.4 million (December 31, 2015  $2.1 million) of the
remaining severance payable. For the year ended December 31, 2015, included in the unit-based compensation recovery of $1.5 million was a $1.7 million recovery from the surrender
of the former Chief Executive Officer's stapled units.

19.  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. 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, 2016
|----------------------------- |  | -----------------------
|
|ASSETS                        |  |                        
|Non-current assets:           |  |                        
|Investment properties         |  | $                      
|Investment in Granite LP      |  |                        
|Other non-current assets      |  |                        
|                              |  |                        
|                              |  |                        
|Current assets:               |  |                        
|Other current assets          |  |                        
|Intercompany receivable(1)    |  |                        
|Cash and cash equivalents     |  |                        
|                              |  |                        
|Total assets                  |  | $                      
|                              |  |                        
|LIABILITIES AND EQUITY        |  |                        
|Non-current liabilities:      |  |                        
|Unsecured debentures, net     |  | $                      
|Other non-current liabilities |  |                        
|                              |  |                        
|                              |  |                        
|Current liabilities:          |  |                        
|Intercompany payable(1)       |  |                        
|Other current liabilities     |  |                        
|                              |  |                        
|Total liabilities             |  |                        
|                              |  |                        
|Equity:                       |  |                        
|Stapled unitholders' equity   |  |                        
|Non-controlling interests     |  |                        
|                              |  |                        
|Total liabilities and equity  |  | $                      
|                              |  |                        

Granite REIT  2016 81

---



|Balance Sheet                 |  | As at December 31, 2015
|----------------------------- |  | -----------------------
|
|ASSETS                        |  |                        
|Non-current assets:           |  |                        
|Investment properties         |  | $                      
|Investment in Granite LP      |  |                        
|Other non-current assets      |  |                        
|                              |  |                        
|                              |  |                        
|Current assets:               |  |                        
|Other current assets          |  |                        
|Intercompany receivable(1)    |  |                        
|Cash and cash equivalents     |  |                        
|                              |  |                        
|Total assets                  |  | $                      
|                              |  |                        
|LIABILITIES AND EQUITY        |  |                        
|Non-current liabilities:      |  |                        
|Unsecured debentures, net     |  | $                      
|Other non-current liabilities |  |                        
|                              |  |                        
|                              |  |                        
|Current liabilities:          |  |                        
|Bank indebtedness             |  |                        
|Intercompany payable(1)       |  |                        
|Other current liabilities     |  |                        
|                              |  |                        
|Total liabilities             |  |                        
|                              |  |                        
|Equity:                       |  |                        
|Stapled unitholders' equity   |  |                        
|Non-controlling interests     |  |                        
|                              |  |                        
|Total liabilities and equity  |  | $                      
|                              |  |                        

82 Granite REIT  2016

---





|Income Statement                                          |  | Year Ended December 31, 2016 |         
|--------------------------------------------------------- |  | ---------------------------- | --------
|
|Revenues                                                  |  | $                            | 223,401 
|General and administrative expenses                       |  |                              | 27,960  
|Interest expense and other financing costs, net           |  |                              | 19,587  
|Early redemption costs of unsecured debentures            |  |                              | 11,920  
|Other costs and expenses, net                             |  |                              | 7,971   
|Share of (income) loss of Granite LP                      |  |                              |        
|Fair value gains on investment properties, net            |  |                              | (175,924
|Fair value losses on financial instruments                |  |                              | 1,150   
|Loss on sale of investment properties                     |  |                              | 2,420   
|                                                          |  |                              |         
|Income before income taxes                                |  |                              | 328,317 
|Income tax expense                                        |  |                              | 47,625  
|                                                          |  |                              |         
|Net income                                                |  |                              | 280,692 
|                                                          |  |                              |         
|Less net income attributable to non-controlling interests |  |                              | 1,370   
|                                                          |  |                              |         
|Net income attributable to stapled unitholders            |  | $                            | 279,322 
|                                                          |  |                              |         

|
|

|Income Statement                                          |  | Year Ended December 31, 2015 |        
|--------------------------------------------------------- |  | ---------------------------- | -------
|
|Revenues                                                  |  | $                            | 216,299
|General and administrative expenses                       |  |                              | 28,317 
|Interest expense and other financing costs, net           |  |                              | 18,746 
|Other costs and expenses, net                             |  |                              | 7,449  
|Share of (income) loss of Granite LP                      |  |                              |       
|Fair value gains on investment properties, net            |  |                              | (73,082
|Fair value losses on financial instruments                |  |                              | 1,760  
|Loss on sale of investment properties                     |  |                              | 1,413  
|                                                          |  |                              |        
|Income before income taxes                                |  |                              | 231,696
|Income tax expense                                        |  |                              | 36,156 
|                                                          |  |                              |        
|Net income                                                |  |                              | 195,540
|                                                          |  |                              |        
|Less net income attributable to non-controlling interests |  |                              | 2,208  
|                                                          |  |                              |        
|Net income attributable to stapled unitholders            |  | $                            | 193,332
|                                                          |  |                              |        

Granite REIT  2016 83

---



|Statement of Cash Flows                                              |  | Year Ended December 31, 2016 |         
|-------------------------------------------------------------------- |  | ---------------------------- | --------
|
|OPERATING ACTIVITIES                                                 |  |                              |         
|Net income                                                           |  | $                            | 280,692 
|Items not involving current cash flows                               |  |                              | (121,864
|Changes in working capital balances                                  |  |                              | 81      
|Other operating activities                                           |  |                              | 1,204   
|                                                                     |  |                              |         
|Cash provided by (used in) operating activities                      |  |                              | 160,113 
|                                                                     |  |                              |         
|INVESTING ACTIVITIES                                                 |  |                              |         
|Investment property capital additions                                |  |                              |         
| Maintenance or improvements                                        |  |                              | (2,063  
| Developments or expansions                                         |  |                              | (17,221 
|Other investing activities                                           |  |                              | 31,063  
|                                                                     |  |                              |         
|Cash provided by investing activities                                |  |                              | 11,779  
|                                                                     |  |                              |         
|FINANCING ACTIVITIES                                                 |  |                              |         
|Distributions paid                                                   |  |                              | (113,095
|Other financing activities                                           |  |                              | 73,134  
|                                                                     |  |                              |         
|Cash used in financing activities                                    |  |                              | (39,961 
|                                                                     |  |                              |         
|Effect of exchange rate changes                                      |  |                              | (4,749  
|                                                                     |  |                              |         
|Net increase (decrease) in cash and cash equivalents during the year |  | $                            | 127,182 
|                                                                     |  |                              |         

84 Granite REIT  2016

---



|Statement of Cash Flows                                            |  | Year Ended December 31, 2015 |         
|------------------------------------------------------------------ |  | ---------------------------- | --------
|
|OPERATING ACTIVITIES                                               |  |                              |         
|Net income                                                         |  | $                            | 195,540 
|Items not involving current cash flows                             |  |                              | (32,170 
|Changes in working capital balances                                |  |                              | 583     
|Other operating activities                                         |  |                              | (4,191  
|                                                                   |  |                              |         
|Cash provided by operating activities                              |  |                              | 159,762 
|                                                                   |  |                              |         
|INVESTING ACTIVITIES                                               |  |                              |         
|Investment property capital additions                              |  |                              |         
| Maintenance or improvements                                      |  |                              | (2,332  
| Developments or expansions                                       |  |                              | (24,238 
|Acquisition of development land                                    |  |                              | (5,990  
|Other investing activities                                         |  |                              | 19,498  
|Cash provided by investing activities from discontinued operations |  |                              | (7,725  
|                                                                   |  |                              |         
|Cash used in investing activities                                  |  |                              | (20,787 
|                                                                   |  |                              |         
|FINANCING ACTIVITIES                                               |  |                              |         
|Distributions paid                                                 |  |                              | (108,327
|Other financing activities                                         |  |                              | (35,631 
|                                                                   |  |                              |         
|Cash used in financing activities                                  |  |                              | (143,958
|                                                                   |  |                              |         
|Effect of exchange rate changes                                    |  |                              | 7,823   
|                                                                   |  |                              |         
|Net increase in cash and cash equivalents during the year          |  | $                            | 2,840   
|                                                                   |  |                              |         

Granite REIT  2016 85

---



20.  COMMITMENTS AND CONTINGENCIES

---

Not later than 1 year

$
450Later than 1 year and not later than 5 years


1,781Later than 5 years


195$
2,426




86 Granite REIT  2016

---



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