EXHIBIT 2

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42 Granite REIT  2014

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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, 2014

Granite REIT  2014 43

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MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

---

Management of Granite Real Estate Investment Trust and Granite REIT Inc. (collectively the "Trust") is responsible for the preparation and presentation
of the combined financial statements and all information included in the 2014 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 2014 Annual Report has been prepared by management to ensure consistency with information contained in the combined financial statements. The combined financial
statements have been audited by independent auditors and reviewed by the Audit Committees and approved by both the Board of Trustees of Granite Real Estate Investment Trust and the Board of Directors
of Granite REIT Inc.

Management
is responsible for the development and maintenance of systems of internal accounting and administrative cost controls of high quality, within reasonable cost. Such systems are designed to
provide reasonable assurance that the financial information is accurate, relevant and reliable and that the Trust's assets are appropriately accounted for and adequately safeguarded. Management has
determined that, as at December 31, 2014 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"), have provided a SOX-related certification in connection with the
Trust's annual disclosure document in the U.S. (Form 40-F) to the U.S. Securities and Exchange Commission. In accordance with Multilateral Instrument 52-109, a
similar certification has been provided to the Canadian Securities Administrators.

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

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

|GRAPHIC                 | GRAPHIC                
|----------------------- | -----------------------
|THOMAS HESLIP           | MICHAEL FORSAYETH      
|Chief Executive Officer | Chief Financial Officer

Toronto,
Canada,
March 4, 2015

44 Granite REIT  2014

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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, 2014 and December 31, 2013 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, 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 and subsidiaries as at December 31, 2014
and December 31, 2013 and their financial performance and their cash flows for the years then ended 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, 2014, 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 4, 2015 expressed an unqualified opinion on the Trust's
internal control over financial reporting.

LOGO

Chartered
Professional Accountants, Chartered Accountants
Licensed Public Accountants
March 4, 2015
Toronto, Canada

Granite REIT  2014 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, 2014, 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, 2014, 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, 2014 of the Trust and our report dated March 4, 2015 expressed an unmodified opinion on those financial statements.

LOGO

Chartered
Professional Accountants, Chartered Accountants
Licensed Public Accountants
March 4, 2015
Toronto, Canada

46 Granite REIT  2014

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Combined Balance Sheets(Canadian dollars in thousands)

|As at December 31,                                |  | Note |  | 2014 |           | 2013
|------------------------------------------------- |  | ---- |  | ---- | --------- | ----
|ASSETS                                            |  |      |  |      |           |     
|Non-current assets:                               |  |      |  |      |           |     
|Investment properties                             |  | 4    |  | $    | 2,310,378 |     
|Deferred tax assets                               |  | 11   |  |      | 7,206     |     
|Fixed assets, net                                 |  |      |  |      | 1,746     |     
|Other assets                                      |  | 5    |  |      | 1,879     |     
|Cross currency interest rate swap                 |  | 6    |  |      | 481       |     
|                                                  |  |      |  |      |           |     
|                                                  |  |      |  |      | 2,321,690 |     
|Current assets:                                   |  |      |  |      |           |     
|Accounts receivable                               |  |      |  |      | 2,247     |     
|Income taxes receivable                           |  | 11   |  |      | 921       |     
|Prepaid expenses and other                        |  |      |  |      | 1,885     |     
|Restricted cash                                   |  | 3    |  |      | 4,782     |     
|Cash and cash equivalents                         |  |      |  |      | 116,233   |     
|                                                  |  |      |  |      |           |     
|Total assets                                      |  |      |  | $    | 2,447,758 |     
|                                                  |  |      |  |      |           |     
|LIABILITIES AND STAPLED UNITHOLDERS' EQUITY       |  |      |  |      |           |     
|Non-current liabilities:                          |  |      |  |      |           |     
|Unsecured debentures, net                         |  | 6    |  | $    | 447,049   |     
|Cross currency interest rate swap                 |  | 6    |  |      | 3,829     |     
|Secured long-term debt                            |  | 7    |  |      | 65,247    |     
|Deferred tax liabilities                          |  | 11   |  |      | 155,708   |     
|Other non-current liabilities                     |  | 8    |  |      | 10,809    |     
|                                                  |  |      |  |      |           |     
|                                                  |  |      |  |      | 682,642   |     
|Current liabilities:                              |  |      |  |      |           |     
|Deferred revenue                                  |  |      |  |      | 5,299     |     
|Bank indebtedness                                 |  | 9    |  |      | 62,645    |     
|Current portion of secured long-term debt         |  | 7    |  |      | 832       |     
|Accounts payable and accrued liabilities          |  | 10   |  |      | 36,649    |     
|Distributions payable                             |  |      |  |      | 9,027     |     
|Income taxes payable                              |  | 11   |  |      | 14,421    |     
|                                                  |  |      |  |      |           |     
|Total liabilities                                 |  |      |  |      | 811,515   |     
|                                                  |  |      |  |      |           |     
|Equity:                                           |  |      |  |      |           |     
|Stapled unitholders' equity                       |  |      |  |      | 1,629,985 |     
|Non-controlling interests                         |  |      |  |      | 6,258     |     
|                                                  |  |      |  |      |           |     
|Total equity                                      |  |      |  |      | 1,636,243 |     
|                                                  |  |      |  |      |           |     
|Total liabilities and stapled unitholders' equity |  |      |  | $    | 2,447,758 |     
|                                                  |  |      |  |      |           |     
|Commitments and contingencies (note 22)           |  |      |  |      |           |     
|See accompanying notes                            |  |      |  |      |           |     

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

Granite REIT  2014 47

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Combined Statements of Income(Canadian dollars in thousands)

|Years ended December 31,                        |                         | Note |     | 2014 |         | 2013   |  
|----------------------------------------------- | ----------------------- | ---- | --- | ---- | ------- | ------ | -
|Rental revenue and tenant recoveries            |                         |      |     | $    | 207,410 |        | $
|Property operating costs                        |                         | 14   | (a) |      | 6,876   |        |  
|General and administrative expenses             |                         | 14   | (b) |      | 28,061  |        |  
|Depreciation and amortization                   |                         |      |     |      | 621     |        |  
|Interest expense and other financing costs, net |                         | 14   | (c) |      | 23,967  |        |  
|Early redemption costs of unsecured debentures  |                         | 6    |     |      | 28,580  |        |  
|Foreign exchange gains, net                     |                         |      |     |      | (3,063  | )      |  
|Fair value losses on investment properties, net |                         | 4    |     |      | 51,620  |        |  
|Fair value gains on financial instruments       |                         | 14   | (d) |      | (177    | )      |  
|Acquisition transaction costs                   |                         |      |     |      | 189     |        |  
|Gain on Meadows holdback                        |                         | 14   | (e) |      |        |        |  
|Loss (gain) on sale of investment properties    |                         | 4    |     |      | (1,416  | )      |  
|                                                |                         |      |     |      |         |        |  
|Income before income taxes                      |                         |      |     |      | 72,152  |        |  
|Income tax expense (recovery)                   |                         | 11   |     |      | 8,492   |        |  
|                                                |                         |      |     |      |         |        |  
|Net income from continuing operations           |                         |      |     |      | 63,660  |        |  
|Net income from discontinued operations         |                         | 15   |     |      | 6,757   |        |  
|                                                |                         |      |     |      |         |        |  
|Net income                                      |                         |      |     | $    | 70,417  |        | $
|                                                |                         |      |     |      |         |        |  
|Net income attributable to:                     |                         |      |     |      |         |        |  
|Stapled unitholders                             |                         |      |     |      |         |        |  
|                                                | Continuing operations   |      |     |      | $       | 63,456 |  
|                                                | Discontinued operations |      |     |      |         | 6,757  |  
|                                                |                         |      |     |      |         |        |  
|                                                |                         |      |     |      | 70,213  |        |  
|                                                |                         |      |     |      |         |        |  
|Non-controlling interests                       |                         |      |     |      |         |        |  
|                                                | Continuing operations   |      |     |      |         | 204    |  
|                                                | Discontinued operations |      |     |      |         |       |  
|                                                |                         |      |     |      |         |        |  
|                                                |                         |      |     |      | 204     |        |  
|                                                |                         |      |     |      |         |        |  
|                                                |                         |      |     | $    | 70,417  |        | $
|                                                |                         |      |     |      |         |        |  

See accompanying notes

48 Granite REIT  2014

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Combined Statements of Comprehensive Income(Canadian dollars in thousands)

|Years ended December 31,                                      |                                                                                                                           | Note |    | 2014 |         | 2013   |  
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ---- | -- | ---- | ------- | ------ | -
|Net income                                                    |                                                                                                                           |      |    | $    | 70,417  |        | $
|Other comprehensive income (loss):                            |                                                                                                                           |      |    |      |         |        |  
|                                                              | Foreign currency translation adjustment(1)                                                                                |      |    |      |         | (9,358 | )
|                                                              | Unrealized gain (loss) on cross currency interest rate swaps(1)                                                           |      | 6  | (d)  |         | 6,200  |  
|                                                              | Net foreign exchange loss on net investment hedge, includes income taxes of nil(1)                                        |      |    |      |         | (1,393 | )
|                                                              | Reclassification of cumulative foreign currency translation amounts relating to foreign operation disposed of in the year |      | 15 |      |         | (5,722 | )
|                                                              |                                                                                                                           |      |    |      |         |        |  
|Total other comprehensive income (loss)                       |                                                                                                                           |      |    |      | (10,273 | )      |  
|                                                              |                                                                                                                           |      |    |      |         |        |  
|Comprehensive income                                          |                                                                                                                           |      |    | $    | 60,144  |        | $
|                                                              |                                                                                                                           |      |    |      |         |        |  
|(1) Items that may be reclassified subsequently to net income |                                                                                                                           |      |    |      |         |        |  
|Comprehensive income attributable to:                         |                                                                                                                           |      |    |      |         |        |  
|Stapled unitholders                                           |                                                                                                                           |      |    |      |         |        |  
|                                                              | Continuing operations                                                                                                     |      |    |      | $       | 57,943 |  
|                                                              | Discontinued operations                                                                                                   |      |    |      |         | 1,666  |  
|                                                              |                                                                                                                           |      |    |      |         |        |  
|                                                              |                                                                                                                           |      |    |      | 59,609  |        |  
|                                                              |                                                                                                                           |      |    |      |         |        |  
|Non-controlling interests                                     |                                                                                                                           |      |    |      |         |        |  
|                                                              | Continuing operations                                                                                                     |      |    |      |         | 535    |  
|                                                              | Discontinued operations                                                                                                   |      |    |      |         |       |  
|                                                              |                                                                                                                           |      |    |      |         |        |  
|                                                              |                                                                                                                           |      |    |      | 535     |        |  
|                                                              |                                                                                                                           |      |    |      |         |        |  
|Comprehensive income                                          |                                                                                                                           |      |    | $    | 60,144  |        | $
|                                                              |                                                                                                                           |      |    |      |         |        |  

See accompanying notes

Granite REIT  2014 49

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

|Year Ended December 31, 2014                         |  | Number
of
Units |  | Stapled Units |           | Contributed
surplus |   | Deficit |  | Accumulated
other
comprehensive
income (loss) |          | Total |         | Non-
controlling
interests |   | Total     |  
|---------------------------------------------------- |  | --------------- |  | ------------- | --------- | ------------------- | - | ------- |  | --------------------------------------------- | -------- | ----- | ------- | -------------------------- | - | --------- | -
|Equity at January 1, 2014                            |  | 46,945          |  | $             | 2,121,412 |                     | $ | 61,425  |  | $                                             | (608,671 | )     | $97,061 |                            | $ | 1,671,227 |  
|Net income                                           |  |                |  |               |          |                     |   |        |  |                                               | 70,213   |       |        |                            |   | 70,213    |  
|Other comprehensive income (loss)                    |  |                |  |               |          |                     |   |        |  |                                               |         |       | (10,604 | )                          |   | (10,604   | )
|Distributions                                        |  |                |  |               |          |                     |   |        |  |                                               | (103,641 | )     |        |                            |   | (103,641  | )
|Contributions from non-controlling interests         |  |                |  |               |          |                     |   |        |  |                                               |         |       |        |                            |   |          |  
|Units issued on exercise of stapled unit options     |  | 50              |  |               | 1,916     |                     |   |        |  |                                               |         |       |        |                            |   | 1,916     |  
|Units issued on settlement of deferred stapled units |  | 22              |  |               | 874       |                     |   |        |  |                                               |         |       |        |                            |   | 874       |  
|                                                     |  |                 |  |               |           |                     |   |         |  |                                               |          |       |         |                            |   |           |  
|Equity at December 31, 2014                          |  | 47,017          |  | $             | 2,124,202 |                     | $ | 61,425  |  | $                                             | (642,099 | )     | $86,457 |                            | $ | 1,629,985 |  
|                                                     |  |                 |  |               |           |                     |   |         |  |                                               |          |       |         |                            |   |           |  

|
|

|Year Ended December 31, 2013                         |  | Number
of
Units |  | Stapled Units |           | Contributed
surplus |   | Deficit |   | Accumulated
other
comprehensive
income (loss) |          | Total |          | Non-
controlling
interests |   | Total     |  
|---------------------------------------------------- |  | --------------- |  | ------------- | --------- | ------------------- | - | ------- | - | --------------------------------------------- | -------- | ----- | -------- | -------------------------- | - | --------- | -
|Equity at January 1, 2013                            |  | 46,833          |  | $             | 2,117,256 |                     | $ | 63,168  |   | $                                             | (654,828 | )     | $(10,784 | )                          | $ | 1,514,812 |  
|Net income                                           |  |                |  |               |          |                     |   |        |   |                                               | 145,031  |       |         |                            |   | 145,031   |  
|Other comprehensive income                           |  |                |  |               |          |                     |   |        |   |                                               |         |       | 107,845  |                            |   | 107,845   |  
|Distributions                                        |  |                |  |               |          |                     |   |        |   |                                               | (98,922  | )     |         |                            |   | (98,922   | )
|Contributions from non-controlling interests         |  |                |  |               |          |                     |   |        |   |                                               |         |       |         |                            |   |          |  
|Units issued on exercise of stapled unit options     |  | 105             |  |               | 3,892     |                     |   |        |   |                                               |         |       |         |                            |   | 3,892     |  
|Units issued on settlement of deferred stapled units |  | 7               |  |               | 264       |                     |   |        |   |                                               |         |       |         |                            |   | 264       |  
|Reclassification of unit-based awards                |  |                |  |               |          |                     |   | (1,743  | ) |                                               | 48       |       |         |                            |   | (1,695    | )
|                                                     |  |                 |  |               |           |                     |   |         |   |                                               |          |       |          |                            |   |           |  
|Equity at December 31, 2013                          |  | 46,945          |  | $             | 2,121,412 |                     | $ | 61,425  |   | $                                             | (608,671 | )     | $97,061  |                            | $ | 1,671,227 |  
|                                                     |  |                 |  |               |           |                     |   |         |   |                                               |          |       |          |                            |   |           |  

See accompanying notes

50 Granite REIT  2014

---



Combined Statements of Cash Flows(Canadian dollars in thousands)

|Years ended December 31,                                           |                                                             | Note |     | 2014 |          | 2013    |  
|------------------------------------------------------------------ | ----------------------------------------------------------- | ---- | --- | ---- | -------- | ------- | -
|OPERATING ACTIVITIES                                               |                                                             |      |     |      |          |         |  
|Net income from continuing operations                              |                                                             |      |     | $    | 63,660   |         | $
|Items not involving current cash flows                             |                                                             | 17   | (a) |      | 64,503   |         |  
|Tenant allowance                                                   |                                                             |      |     |      | (37,769  | )       |  
|Current income tax expense                                         |                                                             | 11   | (a) |      | 4,254    |         |  
|Income taxes paid                                                  |                                                             | 11   | (e) |      | (4,377   | )       |  
|Interest expense                                                   |                                                             |      |     |      | 22,625   |         |  
|Interest paid                                                      |                                                             |      |     |      | (19,349  | )       |  
|Changes in working capital balances from continuing operations     |                                                             | 17   | (b) |      | (6,156   | )       |  
|                                                                   |                                                             |      |     |      |          |         |  
|Cash provided by operating activities from continuing operations   |                                                             |      |     |      | 87,391   |         |  
|Cash provided by operating activities from discontinued operations |                                                             |      |     |      | 5,472    |         |  
|                                                                   |                                                             |      |     |      |          |         |  
|Cash provided by operating activities                              |                                                             |      |     |      | 92,863   |         |  
|                                                                   |                                                             |      |     |      |          |         |  
|INVESTING ACTIVITIES                                               |                                                             |      |     |      |          |         |  
|Investment properties:                                             |                                                             |      |     |      |          |         |  
|                                                                   | Proceeds on disposal, net                                   |      | 4   |      |          | 39,095  |  
|                                                                   | Capital expenditures                                        |      |     |      |          | (43,701 | )
|                                                                   | Business acquisitions (2013  net of cash acquired of $375) |      | 3   |      |          | (75,149 | )
|                                                                   | Acquisition of development lands                            |      | 3   |      |          | (3,831  | )
|Fixed asset additions                                              |                                                             |      |     |      | (458     | )       |  
|Proceeds from notes receivable                                     |                                                             |      |     |      |         |         |  
|Increase in other assets                                           |                                                             |      |     |      | (199     | )       |  
|Cash provided by investing activities from discontinued operations |                                                             | 4,15 |     |      | 104,370  |         |  
|                                                                   |                                                             |      |     |      |          |         |  
|Cash provided by (used in) investing activities                    |                                                             |      |     |      | 20,127   |         |  
|                                                                   |                                                             |      |     |      |          |         |  
|FINANCING ACTIVITIES                                               |                                                             |      |     |      |          |         |  
|Distributions paid                                                 |                                                             |      |     |      | (103,205 | )       |  
|Proceeds from units issued                                         |                                                             |      |     |      | 1,781    |         |  
|Proceeds from unsecured debentures                                 |                                                             | 6    |     |      | 250,000  |         |  
|Repayment of unsecured debentures                                  |                                                             | 6    |     |      | (265,000 | )       |  
|Proceeds from secured long-term debt                               |                                                             |      |     |      | 19,784   |         |  
|Repayment of secured long-term debt                                |                                                             |      |     |      | (225     | )       |  
|Proceeds from bank indebtedness                                    |                                                             |      |     |      | 62,813   |         |  
|Repayments of bank indebtedness                                    |                                                             |      |     |      | (54,740  | )       |  
|Financing costs paid                                               |                                                             |      |     |      | (2,361   | )       |  
|Contributions from non-controlling interests                       |                                                             |      |     |      | 661      |         |  
|Distributions to non-controlling interests                         |                                                             |      |     |      | (221     | )       |  
|                                                                   |                                                             |      |     |      |          |         |  
|Cash provided by (used in) financing activities                    |                                                             |      |     |      | (90,713  | )       |  
|                                                                   |                                                             |      |     |      |          |         |  
|Effect of exchange rate changes on cash and cash equivalents       |                                                             |      |     |      | (1,564   | )       |  
|                                                                   |                                                             |      |     |      |          |         |  
|Net increase in cash and cash equivalents during the year          |                                                             |      |     |      | 20,713   |         |  
|Cash and cash equivalents, beginning of year                       |                                                             |      |     |      | 95,520   |         |  
|                                                                   |                                                             |      |     |      |          |         |  
|Cash and cash equivalents, end of year                             |                                                             |      |     | $    | 116,233  |         | $
|                                                                   |                                                             |      |     |      |          |         |  

See accompanying notes

Granite REIT  2014 51

---



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 4, 2015.

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  2014

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Granite REIT  2014 53

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54 Granite REIT  2014

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Granite REIT  2014 55

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56 Granite REIT  2014

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Granite REIT  2014 57

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58 Granite REIT  2014

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Granite REIT  2014 59

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3.  ACQUISITIONS

---

Acquisitions
of income-producing properties and development lands completed during the years ended December 31, 2014 and 2013 consist of the following:



|                                                                                                                     |  | Total |       
|-------------------------------------------------------------------------------------------------------------------- |  | ----- | ------
|Purchase consideration:                                                                                              |  |       |       
|Cash sourced from Credit Facility (note 9)                                                                           |  | $     | 62,635
|Cash on hand                                                                                                         |  |       | 12,514
|                                                                                                                     |  |       |       
|Total consideration paid                                                                                             |  | $     | 75,149
|                                                                                                                     |  |       |       
|Recognized amounts of identifiable assets acquired
and liabilities assumed measured at their respective fair values: |  |       |       
|Investment properties                                                                                                |  | $     | 75,864
|Working capital                                                                                                      |  |       | (715  
|                                                                                                                     |  |       |       
|Total identifiable net assets                                                                                        |  | $     | 75,149
|                                                                                                                     |  |       |       

60 Granite REIT  2014

---









|                                                                                                                     |  | U.S.
Properties |         | European
Properties |   | Total   |  
|-------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ------------------- | - | ------- | -
|Purchase consideration:                                                                                              |  |                 |         |                     |   |         |  
|Cash sourced from the revolving credit facility (note 9) or issuance of 2018 Debentures (note 6(a))                  |  | $               | 44,076  |                     | $ | 188,737 |  
|Cash on hand                                                                                                         |  |                 | 925     |                     |   |        |  
|Contingent consideration                                                                                             |  |                 | 688     |                     |   |        |  
|                                                                                                                     |  |                 |         |                     |   |         |  
|Total consideration paid                                                                                             |  | $               | 45,689  |                     | $ | 188,737 |  
|                                                                                                                     |  |                 |         |                     |   |         |  
|Recognized amounts of identifiable assets acquired and liabilities assumed measured at their respective fair values: |  |                 |         |                     |   |         |  
|Investment properties                                                                                                |  | $               | 83,450  |                     | $ | 185,704 |  
|Working capital                                                                                                      |  |                 | 777     |                     |   | (1,155  | )
|Restricted cash(1)                                                                                                   |  |                 |        |                     |   | 4,188   |  
|Mortgages payable                                                                                                    |  |                 | (36,437 | )                   |   |        |  
|                                                                                                                     |  |                 |         |                     |   |         |  
|Identifiable net assets                                                                                              |  |                 | 47,790  |                     |   | 188,737 |  
|Non-controlling interests                                                                                            |  |                 | (2,101  | )                   |   |        |  
|                                                                                                                     |  |                 |         |                     |   |         |  
|Total                                                                                                                |  | $               | 45,689  |                     | $ | 188,737 |  
|                                                                                                                     |  |                 |         |                     |   |         |  



Granite REIT  2014 61

---







4.  INVESTMENT PROPERTIES

---

|As at December 31,                    |  | 2014 |           | 2013
|------------------------------------- |  | ---- | --------- | ----
|Income-Producing Properties           |  | $    | 2,275,220 |     
|Properties and Land Under Development |  |      | 31,349    |     
|Land Held For Development             |  |      | 3,809     |     
|                                      |  |      |           |     
|                                      |  | $    | 2,310,378 |     
|                                      |  |      |           |     

Changes
in investment properties are shown in the following table:

|As at December 31,                |  | 2014 |           | 2013 |  
|--------------------------------- |  | ---- | --------- | ---- | -
|
|Balance, beginning of year        |  | $    | 2,325,583 |      | $
|Additions                         |  |      |           |      |  
| Capital expenditures            |  |      | 15,809    |      |  
| Acquisitions                    |  |      | 75,864    |      |  
| Land under development          |  |      |          |      |  
| Completed projects              |  |      | 24,762    |      |  
| Tenant allowances               |  |      | 44,492    |      |  
|Fair value losses, net            |  |      | (51,624   | )    |  
|Foreign currency translation, net |  |      | (4,662    | )    |  
|Disposals                         |  |      | (151,251  | )    |  
|Other changes                     |  |      | (3,753    | )    |  
|                                  |  |      |           |      |  
|Balance, end of year              |  | $    | 2,275,220 |      | $
|                                  |  |      |           |      |  

On June 26, 2014, Granite completed the disposition of its portfolio of Mexican properties to a subsidiary of Magna for gross proceeds of
$113.7 million (U.S. $105.0 million) and incurred a $5.1 million loss on disposal due to certain closing adjustments and associated selling costs. The Trust has presented
the results of the Mexican portfolio as discontinued operations in the combined financial statements (note 15). In addition,

62 Granite REIT  2014

---



during
the year ended December 31, 2014, the Trust disposed of a further four income-producing properties located in the United States and Germany for aggregate gross proceeds of
$37.6 million and incurred a combined loss on disposal of $0.3 million due to the associated selling costs. The Trust also disposed of one parcel of excess land at an income-producing
property in Europe and recorded a gain on disposal of $1.7 million which represents the gross proceeds net of nominal selling costs.

During
the year ended December 31, 2013, the Trust disposed of four income-producing properties located in North America and Europe, for aggregate gross proceeds of $17.4 million and
incurred a $0.6 million loss on disposal due to the associated selling costs.

The
fair value losses during the years ended December 31, 2014 and 2013, excluding properties sold in the relevant year, were $55.0 million and $28.5 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 renewal at the applicable balance sheet dates, less future cash outflows in respect of such leases. Fair values are primarily determined by discounting the
expected future cash flows, generally over a term of 10 years including a terminal value based on the application of a capitalization rate to estimated year 11 cash flows. 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.

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

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

|                 |  | Discount Rate |           | Terminal
Capitalization Rate |  
|---------------- |  | ------------- | --------- | ---------------------------- | -
|
|+50 basis points |  | $             | 2,234,473 |                              | $
|+25 basis points |  |               | 2,271,915 |                              |  
|Base rate        |  |               | 2,310,378 |                              |  
|-25 basis points |  |               | 2,349,859 |                              |  
|-50 basis points |  |               | 2,390,463 |                              |  

Granite REIT  2014 63

---



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

|As at December 31, |  | 2014   |  | 2013 
|------------------ |  | ------ |  | -----
|
|Canada             |  |        |  |      
|Discount rate      |  | 8.50%  |  | 6.50%
|Terminal cap rate  |  | 8.50%  |  | 5.75%
|United States      |  |        |  |      
|Discount rate      |  | 14.00% |  | 6.72%
|Terminal cap rate  |  | 13.00% |  | 5.64%
|Mexico             |  |        |  |      
|Discount rate      |  |       |  |     
|Terminal cap rate  |  |       |  |     
|Germany            |  |        |  |      
|Discount rate      |  | 9.50%  |  | 6.20%
|Terminal cap rate  |  | 9.50%  |  | 7.50%
|Austria            |  |        |  |      
|Discount rate      |  | 9.00%  |  | 8.25%
|Terminal cap rate  |  | 9.50%  |  | 8.75%
|Netherlands        |  |        |  |      
|Discount rate      |  | 9.21%  |  | 6.84%
|Terminal cap rate  |  | 7.50%  |  | 7.50%
|Other              |  |        |  |      
|Discount rate      |  | 10.60% |  | 8.50%
|Terminal cap rate  |  | 10.50% |  | 8.25%

Included
in investment properties is $11.4 million (December 31, 2013  $11.2 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 22).

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

Not later than 1 year

$
205,624Later than 1 year and not later than 5 years


629,150Later than 5 years


316,536$
1,151,310


5.  OTHER ASSETS

---

Other
assets consist of:

|As at December 31,          |  | 2014 |       | 2013
|--------------------------- |  | ---- | ----- | ----
|Deferred financing costs    |  | $    | 524   |     
|Long-term receivables       |  |      | 533   |     
|Interest rate caps (note 7) |  |      | 362   |     
|Deposits                    |  |      | 460   |     
|                            |  |      |       |     
|                            |  | $    | 1,879 |     
|                            |  |      |       |     

64 Granite REIT  2014

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6.  UNSECURED DEBENTURES, NET

---

Unsecured
debentures, net, consist of:

|                  |  |                   |  | 2014 |         | 2013
|----------------- |  | ----------------- |  | ---- | ------- | ----
|
|4.613% Debentures |  | October 2, 2018   |  | $    | 198,515 |     
|3.788% Debentures |  | July 5, 2021      |  |      | 248,534 |     
|6.05% Debentures  |  | December 22, 2016 |  |      |        |     
|                  |  |                   |  |      |         |     
|                  |  |                   |  | $    | 447,049 |     
|                  |  |                   |  |      |         |     







Granite REIT  2014 65

---





|As at December 31,                                  |  | 2014 |       | 2013
|--------------------------------------------------- |  | ---- | ----- | ----
|Financial liability                                 |  |      |       |     
|2018 Cross Currency Interest Rate Swap  fair value |  | $    | 3,829 |     
|                                                    |  |      |       |     
|Financial asset                                     |  |      |       |     
|2021 Cross Currency Interest Rate Swap  fair value |  | $    | 481   |     
|                                                    |  |      |       |     



7.  SECURED LONG-TERM DEBT

---

Secured
long-term debt consists of:

|As at December 31,        |  |               |  |               |  | 2014 |        | 2013
|------------------------- |  | ------------- |  | ------------- |  | ---- | ------ | ----
|
|Mortgage payable          |  | June 10, 2017 |  | LIBOR + 2.50% |  | $    | 23,753 |     
|Mortgage payable          |  | May 10, 2018  |  | LIBOR + 2.50% |  |      | 12,351 |     
|2016 Construction Loan    |  | July 25, 2016 |  | LIBOR + 2.25% |  |      | 13,322 |     
|2017 Construction Loan    |  | June 20, 2017 |  | LIBOR + 2.25% |  |      | 7,534  |     
|                          |  |               |  |               |  |      |        |     
|                          |  |               |  |               |  | $    | 56,960 |     
|Less: due within one year |  |               |  |               |  |      | 717    |     
|                          |  |               |  |               |  |      |        |     
|                          |  |               |  |               |  | $    | 56,243 |     
|                          |  |               |  |               |  |      |        |     

66 Granite REIT  2014

---





2015

$
8942016


1,0022017


26,8362018


13,319$
42,051








8.  OTHER NON-CURRENT LIABILITIES

---

Other
non-current liabilities consist of:

As at December 31,

2014

2013Contingent consideration

$
4,272

$
3,777Tenant allowance payable


6,537


$
10,809

$
3,777


Contingent
consideration was recognized in connection with acquisitions completed in 2013 and is expected to be settled during 2018. The fair value of the contingent consideration was estimated using
an income approach and is dependent upon achieving certain predetermined returns over a five year period. This

Granite REIT  2014 67

---



estimate
is dependent upon a number of assumptions which are subject to change over the period to the date of payment.

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

9.  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") and matures on February 1, 2018 with the option to extend
the maturity date by one year to February 1, 2019, subject to the agreement of lenders in respect of a minimum of 662/3% of the aggregate amount committed under the Credit
Facility. The Credit Facility provides 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 eurocurrency rate) depending on the currency Granite LP borrows in plus an applicable margin of up to 1.45%. At December 31, 2014, Granite LP had $62.6 million
(U.S. $54.0 million) drawn under the Credit Facility and $1.2 million in letters of credit issued against the Credit Facility.

The
Credit Facility replaced an unsecured senior revolving credit facility in the amount of $175.0 million that was available by way of Canadian dollar, U.S. dollar or euro denominated
loans or letters of credit that would have matured on February 1, 2015. Interest on drawn amounts was calculated based on an applicable margin determined by the Trust's external credit rating.
During 2014, the Trust was subject to interest at a rate per annum equal to the base rate (i.e. LIBOR, Canadian prime business rate or eurocurrency rate) depending on the currency the Trust
borrowed in plus an applicable margin of up to 1.63%. At December 31, 2013, the Trust had $53.2 million (U.S. $50.0 million) drawn and $1.2 million in letters of
credit issued against the revolving credit facility.

10.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

---

Accounts
payable and accrued liabilities consist of:

|As at December 31,                               |  | 2014 |        | 2013
|------------------------------------------------ |  | ---- | ------ | ----
|Accounts payable                                 |  | $    | 4,608  |     
|Accrued salaries and wages                       |  |      | 5,197  |     
|Accrued interest payable                         |  |      | 7,129  |     
|Accrued construction payable                     |  |      | 7,652  |     
|Accrued acquisition costs                        |  |      |       |     
|Accrued employee unit-based compensation         |  |      | 3,096  |     
|Accrued trustee/director unit-based compensation |  |      | 4,632  |     
|Other accrued liabilities                        |  |      | 4,335  |     
|                                                 |  |      |        |     
|                                                 |  | $    | 36,649 |     
|                                                 |  |      |        |     

68 Granite REIT  2014

---



11.  INCOME TAXES

---

Years ended December 31,

2014

2013Current income tax:Current taxes

$
3,662

$
4,034Withholding taxes and other


592


4,4904,254


8,524Deferred income tax:Origination and reversal of temporary differences


4,559


5,627Impact of changes in tax rates


68


(87
)Reversal of withholding taxes on profits of subsidiaries


(592
)

(4,430
)Reversal of deferred tax liability upon REIT conversion and related reorganizations





(41,950
)Other


203


(823
)4,238


(41,663
)Income tax expense (recovery)

$
8,492

$
(33,139
)


|
|

Years ended December 31,

2014

2013Income before income taxes

$
72,152

$
110,305Expected income taxes at the Canadian statutory tax rate of 26.5%
(2013  26.5%)

$
19,120

$
29,231Income distributed and taxable to unitholders


(11,178
)

(23,735
)Reversal of deferred tax liability upon REIT conversion and related reorganizations





(41,950
)Net foreign rate differentials


651


2,379Net change in provisions for uncertain tax positions


(1,265
)

(224
)Net permanent differences


813


(160
)Net effect of change in tax rates


68


(87
)Withholding taxes and other items


283


1,407Income tax expense (recovery)

$
8,492

$
(33,139
)


Granite REIT  2014 69

---



|
|

As at December 31,

2014

2013Deferred tax assets:Investment properties

$
1,494

$
2,447Eligible capital expenditures


3,263


3,509Other


2,449


2,217Total deferred tax assets


7,206


8,173Deferred tax liabilities:Investment properties


155,582


165,362Withholding tax on undistributed subsidiary profits


834


1,014Other


(708
)

246Total deferred tax liabilities


155,708


166,622Net deferred tax liabilities

$
148,502

$
158,449


|
|

Years ended December 31,

2014

2013Balance, beginning of year

$
158,449

$
185,215Deferred tax recovery recognized in net income


(9,648
)

(41,825
)Foreign currency translation of deferred tax balances


(299
)

15,059$
148,502

$
158,449




70 Granite REIT  2014

---





|
|

As at December 31,

2014

2013Unrecognized tax benefits balance, beginning of year

$
14,165

$
12,263Decreases for tax positions of prior years


(3,369
)

(510
)Increases for tax positions of current year


3,398


1,749Foreign currency impact


(312
)

663Unrecognized tax benefits balance, end of year

$
13,882

$
14,165




Major JurisdictionsCanada

2008 through 2014United States

2011 through 2014Mexico

2009 through 2014Austria

2009 through 2014Germany

2008 through 2014Netherlands

2013 through 2014




12.  STAPLED UNITHOLDERS' EQUITY

---





Granite REIT  2014 71

---





2014

2013Number
(000s)

Weighted
Average
Exercise
Price

Number
(000s)

Weighted
Average
Exercise
PriceOptions outstanding, January 1

100

$
33.92

205

$
32.01Exercised

(50
)

35.62

(105
)

30.20Options outstanding and exercisable,
December 31

50
(1)
$
32.21

100
(2)
$
33.92




2014

2013Number
(000s)

Weighted
Average
Grant Date
Fair Value

Number
(000s)

Weighted
Average
Grant Date
Fair ValueDSUs outstanding, January 1

87

$
32.92

61

$
30.95Granted

23


40.06

26


37.62DSUs outstanding, December 31

110

$
34.45

87

$
32.92




72 Granite REIT  2014

---





2014

2013Number
(000s)

Weighted
Average
Grant Date
Fair Value

Number
(000s)

Weighted
Average
Grant Date
Fair ValueStapled units outstanding, January 1

62

$
37.42

38

$
35.63Granted

57


39.07

31


39.03Settled

(22
)

38.39

(7
)

35.41Stapled units outstanding, December 31

97

$
38.19

62

$
37.42






As at December 31,

2014

2013Foreign currency translation gains on investments in subsidiaries, net of related hedging activities and non-controlling interests

$
91,747

$
108,551Losses on derivatives designated as net investment hedges


(5,290
)

(11,490
)$
86,457

$
97,061


13.  DISTRIBUTIONS TO STAPLED UNITHOLDERS

---

Total
distributions declared to stapled unitholders in the year ended December 31, 2014 were $103.6 million (2013  $98.9 million) or $2.21
per stapled unit (2013  $2.11 per stapled unit). Distributions payable at December 31, 2014 of $9.0 million, representing the December 2014
distribution, were paid on January 15, 2015. Subsequent to December 31, 2014, distributions of 19.2 cents per stapled unit were declared on January 16 and
February 17, 2015. The distribution declared in January 2015 in the amount of $9.0 million was paid on February 17, 2015 and the distribution declared in
February 2015 will be paid on March 16, 2015.

Granite REIT  2014 73

---



14.  COSTS AND EXPENSES (INCOME)

---

Years ended December 31,

2014

2013Non-recoverable from tenants:Property taxes and utilities

$
1,140

$
1,158Legal


1,106


1,161Environmental and appraisals


563


772Repairs and maintenance


515


592Other


1,180


7154,504


4,398Recoverable from tenants:Property taxes and utilities


1,204


692Repairs and maintenance


384


182Other


784


2732,372


1,147Property operating costs

$
6,876

$
5,545


Years ended December 31,

2014

2013Salaries and benefits

$
14,647

$
12,948Audit, legal and consulting


4,173


3,927REIT conversion and reorganization related costs





2,479Trustee/director fees and related expenses


988


962Unit-based compensation for employees and trustees/directors


3,698


2,105Other


4,555


4,644$
28,061

$
27,065


Years ended December 31,

2014

2013Interest, accretion and costs on debentures

$
20,921

$
18,250Interest on mortgages payable and construction loan


1,546


877Amortization of deferred financing costs


447


589Other interest and accretion charges


1,572


1,30724,486


21,023Capitalized interest


(99
)

(119
)Interest income


(420
)

(318
)$
23,967

$
20,586


Years ended December 31,

2014

2013Foreign exchange forward contracts, net

$
(537
)
$
Interest rate caps


360


(72
)$
(177
)
$
(72
)


74 Granite REIT  2014

---





15.  DISCONTINUED OPERATIONS

---

During
the second quarter of 2014, Granite disposed of its portfolio of Mexican properties. As the Mexican properties represented a significant geographical area of operations, the Trust has
retroactively presented the Mexican portfolio as discontinued operations in the combined financial statements.

Granite's
results of operations from discontinued operations are as follows:

Years ended December 31,

Note

2014

2013Rental revenue



$
7,079

$
13,347Operating costs and expenses




90


335Fair value losses on investment properties, net




4


9,042Income before income taxes




6,985


3,970Income tax expense




(1,702
)

(1,804
)Income from discontinued operations before net gain on sale of disposed properties




5,283


2,166Loss on sale of investment properties(1)

4


(5,071
)

(344
)Reclassification of cumulative foreign currency translation amounts relating to foreign operation disposed of in the year




5,722


Income tax recovery




823


Net gain (loss) on sale of disposed properties




1,474


(344
)Net income from discontinued operations



$
6,757

$
1,822


During the year ended December 31, 2014, Granite paid $5.1 million of current income tax installments associated with the sale of the portfolio of
Mexican properties.

16.  SEGMENTED DISCLOSURE INFORMATION

---

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

Revenues

|Years ended December 31, |  | 2014 |         | 2013
|------------------------ |  | ---- | ------- | ----
|Canada                   |  | $    | 64,253  |     
|United States            |  |      | 43,981  |     
|Austria                  |  |      | 59,484  |     
|Germany                  |  |      | 25,930  |     
|Netherlands              |  |      | 9,587   |     
|Other Europe             |  |      | 4,175   |     
|                         |  |      |         |     
|                         |  | $    | 207,410 |     
|                         |  |      |         |     

Granite REIT  2014 75

---



For
the year ended December 31, 2014, revenues from Magna were approximately 83% (2013  92%) of the Trust's total revenues.

Investment properties

|As at December 31, |  | 2014 |           | 2013
|------------------ |  | ---- | --------- | ----
|Canada             |  | $    | 678,500   |     
|United States      |  |      | 581,335   |     
|Mexico             |  |      |          |     
|Austria            |  |      | 677,101   |     
|Germany            |  |      | 242,540   |     
|Netherlands        |  |      | 97,248    |     
|Other Europe       |  |      | 33,654    |     
|                   |  |      |           |     
|                   |  | $    | 2,310,378 |     
|                   |  |      |           |     

17.  DETAILS OF CASH FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS

---

Years ended December 31,

2014

2013Straight-line rent adjustment

$
4,567

$
1,200Unit-based compensation expense


3,698


2,105Fair value losses on investment properties


51,620


16,182Depreciation and amortization


621


454Fair value gains on financial instruments


(177
)

(72
)Gain on settlement of Meadows note





(5,143
)Loss (gain) on sale of investment properties


(1,416
)

778Amortization of issuance costs and discount accretion of debentures


1,655


494Amortization of deferred financing costs


447


589Foreign exchange on note receivable





(115
)Deferred income taxes


4,238


(41,663
)Other


(750
)

(436
)$
64,503

$
(25,627
)


Years ended December 31,

2014

2013Accounts receivable

$
136

$
1,231Prepaid expenses and other


67


(247
)Accounts payable and accrued liabilities


(6,401
)

169Deferred revenue


42


(1,120
)Restricted cash





522$
(6,156
)
$
555




76 Granite REIT  2014

---



18.  FAIR VALUE AND RISK MANAGEMENT

---



Fair value
through
profit
or lossLoans and receivables/
other financial liabilitiesTotalTotal(Fair value)

(Amortized cost)



(Carrying Value)Measurement basis

(Fair value)

(Fair Value)Financial assetsOther assets
$362
(1)
$
533
(2)
$
533

$
895

$
895Cross currency interest rate swap
481








481


481Accounts receivable



2,247


2,247


2,247


2,247Prepaid expenses and other
586
(3)







586


586Restricted cash



4,782


4,782


4,782


4,782Cash and cash equivalents



116,233


116,233


116,233


116,233$1,429

$
123,795

$
123,795

$
125,224

$
125,224Financial liabilitiesUnsecured debentures, net
$

$
447,049

$
468,700

$
447,049

$
468,700Cross currency interest rate swap
3,829








3,829


3,829Secured long-term debt



66,079


66,079


66,079


66,079Other non-current liabilities



10,809


10,809


10,809


10,809Bank indebtedness



62,645


62,645


62,645


62,645Accounts payable and accrued liabilities
49
(4)

36,600


36,600


36,649


36,649Distributions payable



9,027


9,027


9,027


9,027$3,878

$
632,209

$
653,860

$
636,087

$
657,738




Granite REIT  2014 77

---







Fair value
through
profit
or loss

Loans and receivables/
other financial liabilitiesTotalTotal(Amortized cost)



(Carrying Value)Measurement basis
(Fair value)

(Fair value)

(Fair Value)Financial assetsOther assets
$
678
(5)
$
525
(6)
$
525

$
1,203

$
1,203Accounts receivable




2,491


2,491


2,491


2,491Restricted cash




4,360


4,360


4,360


4,360Cash and cash equivalents




95,520


95,520


95,520


95,520$
678

$
102,896

$
102,896

$
103,574

$
103,574Financial liabilitiesUnsecured debentures, net
$


$
462,070

$
485,558

$
462,070

$
485,558Cross currency interest rate swap

11,003








11,003


11,003Secured long-term debt




41,856


41,856


41,856


41,856Other non-current liabilities




3,777


3,777


3,777


3,777Bank indebtedness




53,180


53,180


53,180


53,180Accounts payable and accrued liabilities




33,178


33,178


33,178


33,178Distributions payable




8,591


8,591


8,591


8,591$
11,003

$
602,652

$
626,140

$
613,655

$
637,143






78 Granite REIT  2014

---







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, 2014

Level 1

Level 2

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

$


$


$
2,310,378Cross currency interest rate swap





481


Interest rate caps included in other assets





362


Foreign exchange forward contracts included in prepaid expenses and other





586


Liabilities measured or disclosed at fair valueUnsecured debentures, net


468,700





Cross currency interest rate swap





3,829


Other non-current liabilities








10,809Secured long-term debt





66,079


Bank indebtedness





62,645


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





49


Net Assets (Liabilities) measured at fair value

$
(468,700
)
$
(131,173
)
$
2,299,569


Granite REIT  2014 79

---



|
|

As at December 31, 2013

Level 1

Level 2

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

$


$


$
2,351,897Interest rate caps included in other assets





678


Liabilities measured or disclosed at fair valueUnsecured debentures, net


485,558





Cross currency interest rate swap





11,003


Other non-current liabilities








3,777Secured long-term debt





41,856


Bank indebtedness





53,180


Net Assets (Liabilities) measured at fair value

$
(485,558
)
$
(105,361
)
$
2,348,120






80 Granite REIT  2014

---











Granite REIT  2014 81

---





(in thousands)



Payments due by yearAs at December 31, 2014

Total

2015

2016

2017

2018

2019

ThereafterUnsecured debentures

$
450,000

$


$


$


$
200,000

$


$
250,000Cross currency interest rate swap


3,829











3,829





Secured long-term debt(1)


66,634


894


16,600


35,821


13,319





Bank indebtedness(1)


62,645











62,645





Interest expense(2):Unsecured debentures, net of cross currency interest rate swap savings


74,711


13,786


13,757


13,757


13,757


6,552


13,102Secured long-term debt


4,108


1,699


1,511


772


126





Bank indebtedness


3,130


1,015


1,015


1,015


85





Contingent consideration


4,817











4,817





Tenant allowance payable


8,423











8,423





Accounts payable and accrued liabilities


36,649


35,947


578


124








Distributions payable


9,027


9,027














$
723,973

$
62,368

$
33,461

$
51,489

$
307,001

$
6,552

$
263,102




19.  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,                                      |  | 2014 |           | 2013
|------------------------------------------------------- |  | ---- | --------- | ----
|Unsecured debentures, net                               |  | $    | 447,049   |     
|Cross currency interest rate swap  financial liability |  |      | 3,829     |     
|Cross currency interest rate swap  financial asset     |  |      | (481      | )   
|Secured long-term debt                                  |  |      | 66,079    |     
|Bank indebtedness                                       |  |      | 62,645    |     
|                                                        |  |      |           |     
|Total debt                                              |  |      | 579,121   |     
|Stapled unitholders' equity                             |  |      | 1,629,985 |     
|                                                        |  |      |           |     
|Total managed capital                                   |  | $    | 2,209,106 |     
|                                                        |  |      |           |     

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:



82 Granite REIT  2014

---





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



Currently,
the Trust's consolidated debt consists of the Credit Facility, the 2018 Debentures, the 2021 Debentures, property specific mortgage financing and the Construction Loans and each of these
components have various financial covenants. These covenants are defined within the relevant document and, depending on the debt instrument, include a total indebtedness ratio, a secured indebtedness
ratio, interest coverage ratio, unencumbered asset ratio, maximum payout ratio and minimum equity amounts. The Trust monitors these provisions and covenants and was in compliance with their respective
requirements at December 31, 2014.

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 2014, the Trust provided to its unitholders a monthly distribution of $0.183 per stapled unit which was increased to $0.192 per stapled unit for December's
distribution. The Board determined this distribution level having considered, among other factors, estimated 2014 and 2015 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.

20.  RELATED PARTY TRANSACTIONS

---

Key
management personnel include the Trustees/Directors, the Chief Executive Officer and the Chief Financial Officer. Information with respect to the Trustees/Directors fees is included in
note 14(b). The compensation paid or payable to the Trust's key management personnel for services was as follows:

|Years ended December 31,                     |  | 2014 |       | 2013
|-------------------------------------------- |  | ---- | ----- | ----
|Salaries, incentives and short-term benefits |  | $    | 2,435 |     
|Unit-based compensation                      |  |      | 1,031 |     
|                                             |  |      |       |     
|                                             |  | $    | 3,466 |     
|                                             |  |      |       |     

Granite REIT  2014 83

---



21.  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, 2014
|------------------------------------------------- |  | -----------------------
|
|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 STAPLED UNITHOLDERS' EQUITY       |  |                        
|Non-current liabilities:                          |  |                        
|Unsecured debentures, net                         |  | $                      
|Other non-current liabilities                     |  |                        
|                                                  |  |                        
|                                                  |  |                        
|Current liabilities:                              |  |                        
|Bank indebtedness                                 |  |                        
|Intercompany payable                              |  |                        
|Other current liabilities                         |  |                        
|                                                  |  |                        
|Total liabilities                                 |  |                        
|                                                  |  |                        
|Equity:                                           |  |                        
|Stapled unitholders' equity                       |  |                        
|Non-controlling interests                         |  |                        
|                                                  |  |                        
|Total liabilities and stapled unitholders' equity |  | $                      
|                                                  |  |                        

84 Granite REIT  2014

---



|
|

|Balance Sheet                                     |  | As at December 31, 2013
|------------------------------------------------- |  | -----------------------
|
|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 STAPLED UNITHOLDERS' EQUITY       |  |                        
|Non-current liabilities:                          |  |                        
|Unsecured debentures, net                         |  | $                      
|Other non-current liabilities                     |  |                        
|                                                  |  |                        
|                                                  |  |                        
|Current liabilities:                              |  |                        
|Bank indebtedness                                 |  |                        
|Intercompany payable                              |  |                        
|Other current liabilities                         |  |                        
|                                                  |  |                        
|Total liabilities                                 |  |                        
|                                                  |  |                        
|Equity:                                           |  |                        
|Stapled unitholders' equity                       |  |                        
|Non-controlling interests                         |  |                        
|                                                  |  |                        
|Total liabilities and stapled unitholders' equity |  | $                      
|                                                  |  |                        

Granite REIT  2014 85

---



|
|

|Income Statement                                          |  | Year Ended December 31, 2014 |        
|--------------------------------------------------------- |  | ---------------------------- | -------
|
|Revenues                                                  |  | $                            | 207,410
|General and administrative expenses                       |  |                              | 28,061 
|Interest expense and other financing costs, net           |  |                              | 23,967 
|Early redemption costs of unsecured debentures            |  |                              | 28,580 
|Other costs and expenses                                  |  |                              | 4,434  
|Share of (income) loss of Granite LP                      |  |                              |       
|Fair value losses on investment properties, net           |  |                              | 51,620 
|Fair value gains on financial instruments                 |  |                              | (177   
|Acquisition transaction costs                             |  |                              | 189    
|Gain on sale of investment properties                     |  |                              | (1,416 
|                                                          |  |                              |        
|Income before income taxes                                |  |                              | 72,152 
|Income tax expense                                        |  |                              | 8,492  
|                                                          |  |                              |        
|Net income from continuing operations                     |  |                              | 63,660 
|Net income from discontinued operations                   |  |                              | 6,757  
|                                                          |  |                              |        
|Net income                                                |  |                              | 70,417 
|                                                          |  |                              |        
|Less net income attributable to non-controlling interests |  |                              | 205    
|                                                          |  |                              |        
|Net income attributable to stapled unitholders            |  | $                            | 70,212 
|                                                          |  |                              |        

86 Granite REIT  2014

---



|
|

|Income Statement                                          |  | Year Ended December 31, 2013 |        
|--------------------------------------------------------- |  | ---------------------------- | -------
|
|Revenues                                                  |  | $                            | 189,900
|General and administrative expenses                       |  |                              | 27,065 
|Interest expense and other financing costs, net           |  |                              | 20,586 
|Other costs and expenses                                  |  |                              | 5,953  
|Share of (income) loss of Granite LP                      |  |                              |       
|Fair value losses on investment properties, net           |  |                              | 16,182 
|Fair value gains on financial instruments                 |  |                              | (72    
|Loss on sale of investment properties                     |  |                              | 778    
|Acquisition transaction costs                             |  |                              | 14,246 
|Gain on Meadows holdback                                  |  |                              | (5,143 
|                                                          |  |                              |        
|Income before income taxes                                |  |                              | 110,305
|Income tax recovery                                       |  |                              | (33,139
|                                                          |  |                              |        
|Net income from continuing operations                     |  |                              | 143,444
|Net income from discontinued operations                   |  |                              | 1,822  
|                                                          |  |                              |        
|Net income                                                |  |                              | 145,266
|                                                          |  |                              |        
|Less net income attributable to non-controlling interests |  |                              | 237    
|                                                          |  |                              |        
|Net income attributable to stapled unitholders            |  | $                            | 145,029
|                                                          |  |                              |        

Granite REIT  2014 87

---



|
|

|Statement of Cash Flows                                            |  | Year Ended December 31, 2014 |         
|------------------------------------------------------------------ |  | ---------------------------- | --------
|
|OPERATING ACTIVITIES                                               |  |                              |         
|Net income from continuing operations                              |  | $                            | 63,660  
|Items not involving current cash flows                             |  |                              | 64,503  
|Changes in working capital balances from continuing operations     |  |                              | (6,229  
|Other operating activities                                         |  |                              | (34,616 
|                                                                   |  |                              |         
|Cash provided by operating activities from continuing operations   |  |                              | 87,318  
|Cash provided by operating activities from discontinued operations |  |                              | 5,472   
|                                                                   |  |                              |         
|Cash provided by operating activities                              |  |                              | 92,790  
|                                                                   |  |                              |         
|INVESTING ACTIVITIES                                               |  |                              |         
|Investment property capital additions                              |  |                              | (47,532 
|Business acquisitions                                              |  |                              | (75,149 
|Other investing activities                                         |  |                              | 38,438  
|Cash provided by investing activities from discontinued operations |  |                              | 104,370 
|                                                                   |  |                              |         
|Cash provided by investing activities                              |  |                              | 20,127  
|                                                                   |  |                              |         
|FINANCING ACTIVITIES                                               |  |                              |         
|Distributions paid                                                 |  |                              | (103,205
|Other financing activities                                         |  |                              | 12,492  
|                                                                   |  |                              |         
|Cash used in financing activities                                  |  |                              | (90,713 
|                                                                   |  |                              |         
|Effect of exchange rate changes                                    |  |                              | (1,564  
|                                                                   |  |                              |         
|Net increase in cash and cash equivalents during the year          |  | $                            | 20,640  
|                                                                   |  |                              |         

88 Granite REIT  2014

---



|
|

|Statement of Cash Flows                                            |  | Year Ended December 31, 2013 |         
|------------------------------------------------------------------ |  | ---------------------------- | --------
|
|OPERATING ACTIVITIES                                               |  |                              |         
|Net income from continuing operations                              |  | $                            | 143,444 
|Items not involving current cash flows                             |  |                              | (25,627 
|Changes in working capital balances from continuing operations     |  |                              | 555     
|Other operating activities                                         |  |                              | (1,015  
|                                                                   |  |                              |         
|Cash provided by operating activities from continuing operations   |  |                              | 117,357 
|Cash provided by operating activities from discontinued operations |  |                              | 10,537  
|                                                                   |  |                              |         
|Cash provided by operating activities                              |  |                              | 127,894 
|                                                                   |  |                              |         
|INVESTING ACTIVITIES                                               |  |                              |         
|Business acquisitions (net of cash acquired of $375)               |  |                              | (233,363
|Investment property capital additions                              |  |                              | (43,057 
|Other investing activities                                         |  |                              | 22,831  
|                                                                   |  |                              |         
|Cash used in investing activities                                  |  |                              | (253,589
|                                                                   |  |                              |         
|FINANCING ACTIVITIES                                               |  |                              |         
|Distributions paid                                                 |  |                              | (90,331 
|Other financing activities                                         |  |                              | 252,460 
|                                                                   |  |                              |         
|Cash provided by financing activities                              |  |                              | 162,129 
|                                                                   |  |                              |         
|Effect of exchange rate changes                                    |  |                              | 8,013   
|                                                                   |  |                              |         
|Net increase in cash and cash equivalents during the year          |  | $                            | 44,447  
|                                                                   |  |                              |         

Granite REIT  2014 89

---



22.  COMMITMENTS AND CONTINGENCIES

---

Not later than 1 year

$
428Later than 1 year and not later than 5 years


858Later than 5 years


270$
1,556




23.  SUBSEQUENT EVENTS

---

90 Granite REIT  2014

---



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