Granite Reit (GRPU) 40-F 2017 FY Annual report (Canada)

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EXHIBIT 2

Audited Combined Financial Statements
of Granite Real Estate Investment Trust
and Granite REIT Inc.
For the year ended December 31, 2017

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 2017 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 2017 Annual Report has been prepared by management to ensure consistency with information contained in the combined financial statements. The combined financial statements have been audited by independent auditors and reviewed by the Audit Committees and approved by both the Board of Trustees of Granite Real Estate Investment Trust and the Board of Directors of Granite REIT Inc.

Management is responsible for the development and maintenance of systems of internal accounting and administrative controls of high quality. Such systems are designed to provide reasonable assurance that the financial information is accurate, relevant and reliable and that the Trust's assets are appropriately accounted for and adequately safeguarded. Management has determined that, as at December 31, 2017 and based on the framework set forth inInternal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, internal control over financial reporting was effective. The Trust's Chief Executive Officer and Chief Financial Officer, in compliance with Section 302 of the U.S. Sarbanes-Oxley Act of 2002 ("SOX"), has provided a SOX-related certification in connection with the Trust's annual disclosure document in the U.S. (Form 40-F) to the U.S. Securities and Exchange Commission. In accordance with National Instrument 52-109, a similar certification has been provided to the Canadian Securities Administrators.

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

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

Michael Forsayeth Chief Executive Officer	Ilias Konstantopoulos Chief Financial Officer

Toronto, Canada,
March 1, 2018

​50      Granite REIT 2017

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.

Opinion on the Combined Financial Statements

We have audited the accompanying combined financial statements of Granite REIT Inc. and Granite Real Estate Investment Trust and subsidiaries (collectively, the "Trust"), which comprise the combined balance sheets as at December 31, 2017 and December 31, 2016, the combined statements of income, comprehensive income, unitholders' equity and cash flows for the years then ended, and the related notes, including a summary of significant accounting policies and other explanatory information (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Trust as at December 31, 2017 and December 31, 2016, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Report on Internal Control over Financial Reporting

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Trust's internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2018 expressed an unqualified opinion on the Trust's internal control over financial reporting.

Basis for Opinion

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these 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 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 financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error. Those standards also require that we comply with ethical requirements. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Further, we are required to be independent of the Trust in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and to fulfill our other ethical responsibilities in accordance with these requirements.

An audit includes performing procedures to assess the risks of material misstatement of the financial statements, whether due to fraud or error, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those

​Granite REIT 2017        51

risk assessments, we consider internal control relevant to the Trust's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies and principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

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

/s/ Deloitte LLP

Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada

March 1, 2018

We have served as the Trust's auditor since 2012.

​52      Granite REIT 2017

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.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Granite REIT Inc. and Granite Real Estate Investment Trust and subsidiaries (collectively, the "Trust") as of December 31, 2017, based on criteria established inInternal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control-Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB) and Canadian generally accepted auditing standards, the combined financial statements as of and for the year ended December 31, 2017, of the Trust and our report dated March 1, 2018, expressed an unmodified/unqualified opinion on those financial statements.

Basis for Opinion

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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Trust in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. 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.

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed 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.

​Granite REIT 2017        53

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte LLP

Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada

March 1, 2018

​54      Granite REIT 2017

Granite REIT Annual Report 2017

Combined Balance Sheets
(Canadian dollars in thousands)

As at December 31,	Note	2017		2016
ASSETS
Non-current assets:
Investment properties	4	$	2,733,568	$	2,653,095
Deferred tax assets	13(c)	5,742		6,399
Fixed assets, net		951		775
Other assets		666		714
		2,740,927		2,660,983
Current assets:
Assets held for sale	5	391,453		—
Accounts receivable		2,310		1,066
Income taxes receivable	13	180		381
Prepaid expenses and other	9	2,029		2,434
Restricted cash		515		563
Cash and cash equivalents	15(d)	69,019		246,215
Total assets		$	3,206,433	$	2,911,642
LIABILITIES AND EQUITY
Non-current liabilities:
Unsecured debentures, net	6(a)	$	647,306	$	646,768
Cross currency interest rate swaps	6(b)	61,466		10,641
Deferred tax liabilities	13(c)	244,052		238,251
Other liability	7	—		7,777
		952,824		903,437
Current liabilities:
Other liability	7	8,968		—
Deferred revenue	9	3,965		5,489
Bank indebtedness	8	32,552		—
Accounts payable and accrued liabilities	9	43,342		31,465
Distributions payable	10	10,647		10,226
Income taxes payable	13	16,273		11,289
Total liabilities		1,068,571		961,906
Equity:
Stapled unitholders' equity	11	2,136,614		1,948,207
Non-controlling interests	11	1,248		1,529
Total equity		2,137,862		1,949,736
Total liabilities and equity		$	3,206,433	$	2,911,642

Commitments and contingencies (note 20)
See accompanying notes

On behalf of the Boards:
/s/ Kelly Marshall Director/Trustee	/s/ Gerald J. Miller Director/Trustee

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Granite REIT Annual Report 2017

Combined Statements of Income
(Canadian dollars in thousands)

Years ended December 31,	Note	2017			2016
Rental revenue and tenant recoveries		$	221,031	​	$	223,401	​
Lease termination and close-out fees		1,607		​	—		​
Revenue		222,638		​	223,401		​
Property operating costs	12(a)	9,300		​	7,638		​
General and administrative expenses	12(b)	26,066		​	27,960		​
Proxy contest expenses	12(c)	5,866		​	—		​
Depreciation and amortization		335		​	707		​
Interest expense and other financing costs, net	12(d)	19,471		​	19,587		​
Early redemption costs of unsecured debentures	6(c)	—		​	11,920		​
Foreign exchange losses (gains), net		572		​	(374		)
Fair value gains on investment properties, net	4	(212,106		)	(175,924		)
Fair value losses on financial instruments	12(e)	823		​	1,150		​
Acquisition transaction costs	3	718		​	—		​
Loss on sale of investment properties	4, 5	427		​	2,420		​
Income before income taxes		371,166		​	328,317		​
Income tax expense	13	13,418		​	47,625		​
Net income		$	357,748	​	$	280,692	​
Net income attributable to:				​			​
Stapled unitholders		$	357,702	​	$	279,325	​
Non-controlling interests		46		​	1,367		​
		$	357,748	​	$	280,692	​

See accompanying notes

​56      Granite REIT 2017

Granite REIT Annual Report 2017

Combined Statements of Comprehensive Income
(Canadian dollars in thousands)

Years ended December 31,	Note	2017			2016
Net income		$	357,748	​	$	280,692	​
Other comprehensive income (loss):				​			​
Foreign currency translation adjustment(1)		17,825		​	(81,689		)
Fair value gain (loss) on cross currency interest rate swaps(1)	6(b)	(51,213		)	13,162		​
Net foreign exchange gain (loss) on net investment hedge, includes income taxes of nil(1)		(1,597		)	1,451		​
Total other comprehensive loss		(34,985		)	(67,076		)
Comprehensive income		$	322,763	​	$	213,616	​

⁽¹⁾

Items that may be reclassified subsequently to net income if a foreign subsidiary is disposed of or hedges are terminated or no longer assessed as effective (note 2(h)).

Comprehensive income attributable to:
Stapled unitholders	$	322,534	$	212,559
Non-controlling interests	229		1,057
Comprehensive income	$	322,763	$	213,616

See accompanying notes

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Granite REIT Annual Report 2017

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

	Number of units (000s)													Accumulated other comprehensive income (loss)				Stapled unitholders' equity				Non- controlling interests
Year ended December 31, 2017				Stapled units			Contributed surplus				Deficit															Equity
As at January 1, 2017	​	47,123	​	$	2,128,378	​		$	61,425	​	$	(395,330	)		$	153,734	​		$	1,948,207	​		$	1,529	​	$	1,949,736	​
Net income	​	—	​	—		​	​	—		​	357,702		​	​	—		​	​	357,702		​	​	46		​	357,748		​
Other comprehensive income (loss)	​	—	​	—		​	​	—		​	—		​	​	(35,168		)	​	(35,168		)	​	183		​	(34,985		)
Distributions	​	—	​	—		​	​	—		​	(123,058		)	​	—		​	​	(123,058		)	​	(510		)	(123,568		)
Units issued under the stapled unit plan	​	22	​	977		​	​	—		​	—		​	​	—		​	​	977		​	​	—		​	977		​
Units repurchased for cancellation	​	(242	)	(10,895		)	​	(1,151		)	—		​	​	—		​	​	(12,046		)	​	—		​	(12,046		)
As at December 31, 2017	​	46,903	​	$	2,118,460	​		$	60,274	​	$	(160,686	)		$	118,566	​		$	2,136,614	​		$	1,248	​	$	2,137,862	​

Year ended December 31, 2016	Number of units (000s)			Stapled units			Contributed surplus			Deficit			Accumulated other comprehensive income (loss)				Stapled unitholders' equity				Non- controlling interests				Equity
As at January 1, 2016	​	47,017	​	$	2,124,198	​		$	61,425	$	(557,092	)		$	220,500	​		$	1,849,031	​		$	9,756	​	$	1,858,787	​
Net income	​	—	​	—		​	​	—		279,325		​	​	—		​	​	279,325		​	​	1,367		​	280,692		​
Other comprehensive loss	​	—	​	—		​	​	—		—		​	​	(66,766		)	​	(66,766		)	​	(310		)	(67,076		)
Distributions	​	—	​	—		​	​	—		(114,293		)	​	—		​	​	(114,293		)	​	(461		)	(114,754		)
Acquisition of non-controlling interests (note 11)	​	—	​	—		​	​	—		(3,270		)	​	—		​	​	(3,270		)	​	(8,823		)	(12,093		)
Units issued on exercise of stapled unit options	​	50	​	2,084		​	​	—		—		​	​	—		​	​	2,084		​	​	—		​	2,084		​
Units issued under the stapled unit plan	​	56	​	2,097		​	​	—		—		​	​	—		​	​	2,097		​	​	—		​	2,097		​
Units repurchased for cancellation	​	—	(1)	(1		)	​	—		—		​	​	—		​	​	(1		)	​	—		​	(1		)
As at December 31, 2016	​	47,123	​	$	2,128,378	​		$	61,425	$	(395,330	)		$	153,734	​		$	1,948,207	​		$	1,529	​	$	1,949,736	​

⁽¹⁾

20 stapled units were repurchased

See accompanying notes

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Granite REIT Annual Report 2017

Combined Statements of Cash Flows
(Canadian dollars in thousands)

Years ended December 31,	Note	2017			2016
OPERATING ACTIVITIES				​			​
Net income		$	357,748	​	$	280,692	​
Items not involving current cash flows	15(a)	(192,530		)	(121,864		)
Leasing commissions paid		(2,581		)	(2,485		)
Tenant incentives paid		(1,036		)	(1,174		)
Current income tax expense	13(a)	7,709		​	6,881		​
Income taxes paid	13(e)	(3,468		)	(225		)
Interest expense		18,151		​	17,792		​
Interest paid		(17,719		)	(19,585		)
Changes in working capital balances	15(b)	(7,597		)	(41		)
Cash provided by operating activities		158,677		​	159,991		​
INVESTING ACTIVITIES				​			​
Investment properties:				​			​
Business acquisition	3	(153,979		)	—		​
Proceeds from disposals, net	4	—		​	39,594		​
Capital expenditures				​			​
— Maintenance or improvements		(10,736		)	(2,063		)
— Developments or expansions		(72,404		)	(17,221		)
Payment of contingent consideration	12(e)	—		​	(8,802		)
Fixed asset additions		(553		)	(225		)
Decrease (increase) in other assets		(175		)	496		​
Cash provided by (used in) investing activities		(237,847		)	11,779		​
FINANCING ACTIVITIES				​			​
Distributions paid		(122,637		)	(113,095		)
Proceeds from unsecured debentures	6(a)	—		​	400,008		​
Repayment of unsecured debentures	6(c)	—		​	(200,000		)
Proceeds from secured long-term debt		—		​	11,820		​
Repayments of secured long-term debt		—		​	(106,662		)
Proceeds from bank indebtedness		121,097		​	96,595		​
Repayments of bank indebtedness		(90,142		)	(114,521		)
Financing costs paid		(1,000		)	(1,505		)
Termination of cross currency interest rate swap	6(c)	—		​	(1,657		)
Acquisition of non-controlling interests	11	—		​	(12,093		)
Distributions to non-controlling interests		(510		)	(461		)
Repurchase of stapled units		(12,046		)	(1		)
Proceeds from units issued		—		​	1,611		​
Cash used in financing activities		(105,238		)	(39,961		)
Effect of exchange rate changes on cash and cash equivalents		7,212		​	(4,749		)
Net increase (decrease) in cash and cash equivalents during the year		(177,196		)	127,060		​
Cash and cash equivalents, beginning of year		246,215		​	119,155		​
Cash and cash equivalents, end of year	15(d)	$	69,019	​	$	246,215	​

See accompanying notes

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Granite REIT Annual Report 2017

Notes to Combined Financial Statements
(All amounts in thousands of Canadian dollars 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. 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 Real Estate Investment Trust ("Granite REIT") and one common share of Granite REIT Inc. ("Granite GP"). 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 as subsequently amended on January 3, 2013 and December 20, 2017. Granite GP was incorporated on September 28, 2012 under theBusiness Corporations Act (British Columbia). Granite REIT, Granite GP and their subsidiaries (together "Granite" or the "Trust") are carrying on the business previously conducted by 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 includes Magna International Inc. and its operating subsidiaries (together "Magna") as its largest tenants, in addition to tenants from other industries.

These combined financial statements were approved by the Board of Trustees of Granite REIT and Board of Directors of Granite GP on March 1, 2018.

2.    SIGNIFICANT ACCOUNTING POLICIES

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

(a)

Basis of Presentation and Statement of Compliance

The combined financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

(b)

Combined Financial Statements and Basis of Consolidation

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

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

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Granite REIT Annual Report 2017

(c)

Trust Units

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

(d)

Investment Properties

The Trust accounts for its investment properties, which include income-producing properties, properties under development and land held for development, in accordance with IAS 40, Investment Property. For acquired investment properties that meet the definition of a business, the acquisition is accounted for as a business combination (note 2(e)); otherwise they are initially measured at cost including directly attributable expenses. Subsequent to acquisition, investment properties are carried at fair value, which is determined based on available market evidence at the balance sheet date including, among other things, rental revenue from current leases and reasonable and supportable assumptions that represent what knowledgeable, willing parties would assume about rental revenue from future leases less future cash outflows in respect of capital expenditures. Gains and losses arising from changes in fair value are recognized in net income in the period of change.

Income-Producing Properties

The carrying value of income-producing properties includes the impact of straight-line rental revenue (note 2(k)), tenant incentives and deferred leasing costs since these amounts are incorporated in the determination of the fair value of income-producing properties.

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

Properties Under Development

The Trust's development properties are classified as such until the property is substantially completed and available for occupancy. The Trust capitalizes acquisition, development and expansion costs, including direct construction costs, borrowing costs and indirect costs wholly attributable to development. Borrowing costs are capitalized to projects under development or construction based on the average accumulated expenditures outstanding during the period multiplied by the Trust's average borrowing rate on existing debt. Where borrowings are associated with specific developments, the amount capitalized is the gross borrowing cost incurred on such borrowings less any investment income arising on temporary investment of these borrowings. The capitalization of borrowing costs is suspended if there are prolonged periods that development activity is interrupted. The Trust capitalizes direct and indirect costs, including property taxes and insurance of the development property if activities necessary to ready the development property for its intended use are in progress. Costs of internal personnel and other indirect costs that are not wholly attributable to a project are expensed as incurred.

Properties under development are measured at fair value with appropriate estimates made for construction costs and timeline and related assumptions in order to determine the fair value of the property.

(e)

Business Combinations

The Trust accounts for investment property acquisitions as a business combination if the particular assets and set of activities acquired can be operated and managed as a business in their current state for the purpose of providing a return to the unitholders. The Trust applies the acquisition method to

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Granite REIT Annual Report 2017

account for business combinations. The consideration transferred for a business combination is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Trust. The total consideration includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired as well as liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.

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

Acquisition related costs are expensed as incurred.

Any contingent consideration is recognized at fair value at the acquisition date. Subsequent changes to the fair value of contingent consideration that is recorded as an asset or liability is recognized in accordance with IAS 39, Financial Instruments: Recognition and Measurement ("IAS 39") in net income.

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

(f)

Assets Held for Sale

Non-current assets (and disposal groups) are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is satisfied when the asset is available for immediate sale in its present condition, management is committed to the sale, and it is highly probable to occur within one year.

(g)

Foreign Currency Translation

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

In preparing the financial statements of each entity, transactions in currencies other than the entity's functional currency (foreign currencies) are recognized at the average rates of exchange prevailing in the period. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognized in net income in the period in which they arise except for:

•

The effective portion of exchange differences on transactions entered into in order to hedge certain foreign currency risks are recognized in other comprehensive income;

•

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

•

Exchange differences on foreign currency borrowings related to capitalized interest for assets under construction.

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(h)

Financial Instruments and Hedging

Financial assets

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

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

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

Financial liabilities

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

Derivatives and Hedging

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

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

(i)

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash on account, demand deposits and short-term investments with maturities of less than three months at the date of acquisition. In accordance with IAS 7, Statement of Cash Flows, also recognized in cash equivalents may be short-term investments with original maturities

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longer than three months but less than six months since they can be readily converted into known amounts of cash and are subject to an insignificant risk of changes in value.

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

(j)

Fixed Assets

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

(k)

Revenue Recognition

Where Granite has retained substantially all the benefits and risks of ownership of its rental properties, leases with its tenants are accounted for as operating leases. Where substantially all the benefits and risks of ownership of the Trust's rental properties have been transferred to its tenants, the Trust's leases are accounted for as finance leases. All of the Trust's current leases (the "Leases") are operating leases.

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

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

(l)

Unit-Based Compensation Plans

Incentive Stock Option Plan

Compensation expense for option grants is based on the fair value of the options at the grant date and is recognized over the period from the grant date to the date the award is vested. A liability was recognized for outstanding options based upon the fair value as the Trust is an open-ended trust making its units redeemable. During the period in which options are outstanding, the liability is adjusted for changes in the fair value with such adjustments being recognized as compensation expense in general and administrative expenses in the period in which they occur. The liability balance is reduced as options are exercised and recorded in equity as stapled units along with the proceeds received on exercise.

Executive Deferred Stapled Unit Plan

The executive deferred stapled unit plan is measured at fair value at the date of grant and amortized to compensation expense from the effective date of the grant to the final vesting date. Compensation expense is recognized on a proportionate basis consistent with the vesting features of each tranche of the grant. Compensation expense for executive deferred stapled units granted under the plan is recognized as general and administrative expenses with a corresponding liability recognized based on the fair value of the Trust's stapled units as the Trust is an open-ended trust making its units redeemable. During the period in which the executive deferred stapled units are outstanding, the

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liability is adjusted for changes in the market value of the Trust's stapled unit, with such adjustments being recognized as compensation expense in general and administrative expenses in the period in which they occur. The liability balance is reduced as deferred stapled units are settled for stapled units and recorded in equity.

Director/Trustee Deferred Share Unit Plan

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

(m)

Income Taxes

Operations in Canada

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

The Trust's qualification as a REIT results in no current or deferred income tax being recognized in the combined financial statements for income taxes related to the Canadian investment properties. Current income tax related to certain taxable Canadian entities is determined on the basis of enacted or substantively enacted tax rates and laws at each balance sheet date.

Operations in the United States

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

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

Operations in Europe

The Trust consolidates certain entities that continue to be subject to income tax.

Income taxes for taxable entities in Europe, as well as other entities in Canada or the United States subject to tax, are recorded as follows:

Current Income Tax

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

Deferred Income Tax

Deferred income tax is recorded, using the liability method, on temporary differences arising between the tax basis of assets and liabilities and the amounts reported in the combined financial statements. Deferred income tax is measured using tax rates and laws that are enacted and substantively enacted as

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at each balance sheet date which are expected to apply when the temporary differences are expected to reverse. Deferred income tax assets are recognized only to the extent that it is probable that sufficient future taxable profit will be available against which the deductible temporary difference can be utilized.

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

(n)

Significant Accounting Judgments, Estimates and Assumptions

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

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

Judgments

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

Leases

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

Investment properties

The Trust's policy relating to investment properties is described in note 2(d). In applying this policy, judgment is used in determining whether certain costs incurred for tenant improvements are additions to the carrying amount of the property or represent incentives, identifying the point at which practical completion of properties under development occurs and determining borrowing costs to be capitalized to the carrying value of properties under development. Judgment is also applied in determining the use, extent and frequency of independent appraisals.

Income taxes

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

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Estimates and Assumptions

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

Valuation of investment properties

The fair value of investment properties is determined by management using primarily the discounted cash flow method in which the income and expenses are projected over the anticipated term of the investment plus a terminal value discounted using an appropriate discount rate. The Trust obtains, from time to time, appraisals from independent qualified real estate valuation experts. However, the Trust does not measure its investment properties based on these valuations but uses such appraisals as data points, together with other external market information accumulated by management, in arriving at its own conclusions on values. Management uses valuation assumptions such as discount rates, terminal capitalization rates and market rental rates applied in external appraisals or sourced from valuation experts; however, the Trust also uses its historical renewal experience with tenants, its direct knowledge of the specialized nature of Granite's portfolio and tenant profile and the actual condition of the properties in making business judgments about lease renewal probabilities, renewal rents and capital expenditures. The critical assumptions relating to the Trust's estimates of fair values of investment properties include the receipt of contractual rents, contractual renewal terms, expected future market rental rates, discount rates that reflect current market uncertainties, capitalization rates and recent investment property prices. If there is any change in these assumptions or regional, national or international economic conditions, the fair value of investment properties may change materially. Refer to note 4 for further information on the estimates and assumptions made by management.

Fair value of financial instruments

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

Income taxes

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

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

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(o)

Future Accounting Policy Changes

IFRS 9,Financial Instruments

In July 2014, the IASB issued IFRS 9,Financial Instruments ("IFRS 9") which replaces IAS 39,Financial Instruments: Recognition and Measurement effective January 1, 2018. IFRS 9 provides new guidance on the classification and measurement, impairment and hedge accounting for financial instruments in addition to clarification for the treatment of modifications of financial liabilities. IFRS 9 is required to be adopted retrospectively with certain available transition provisions which allow the Trust to elect not to restate prior period comparative information.

The Trust is in the final stages of its evaluation of the impact of this standard on its combined financial statements. The Trust will adopt IFRS 9 for the annual period beginning January 1, 2018, however, this standard is not expected to have any significant impact on the combined financial statements.

Classification and measurement:

IFRS 9 requires a new approach for the classification and measurement of financial assets based on the Trust's business models for managing these financial assets and their contractual cash flow characteristics. This approach is summarized as follows:

•

Assets held for the purpose of collecting contractual cash flows that solely represent payments of principal and interest will be measured at amortized cost.

•

Assets held within a business model where assets are both held for the purpose of collecting contractual cash flows or sold prior to maturity and the contractual cash flows solely represent payments of principal and interest will be measured at fair value through other comprehensive income ("FVTOCI").

•

Assets held within another business model or assets that do not have contractual cash flow characteristics that are solely payments of principal and interest will be measured at fair value through profit or loss ("FVTPL").

The Trust has completed its review of all financial instruments held and has performed cash flow and business model assessments on the Trust's financial assets, and the expected impact is summarized as follows:

•

The Trust's cash and cash equivalents, restricted cash, accounts receivable, and long-term receivables currently measured at amortized costs will continue to be measured at amortized cost.

•

The Trust's derivative asset and liability instruments will continue to be measured at FVTPL.

Impairment:

IFRS 9 introduces a new expected credit loss ("ECL") impairment model for all financial assets measured at amortized cost or debt instruments measured at FVTOCI. The new ECL model will result in an allowance for expected credit losses being recorded regardless of whether there has been an actual loss event.

The ECL model is forward-looking and requires the use of a reasonable and supportable forecast of future conditions in the determination of whether there has been a significant increase in credit risk since the origination of the financial instrument. The Trust continues to refine certain aspects of the expected credit loss modelling process leading up to its March 31, 2018 first quarter reporting, and the expected impact is summarized as follows:

•

The Trust does not expect to record a material ECL allowance against loans and notes receivable as historical experience of loss on these balances is insignificant and based on the assessment of

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forward looking information no significant increases in expected losses are expected. The Trust will continue to assess the valuation of these instruments.

•

The Trust does not expect to record a material ECL allowance against accounts receivable and has determined that its internal processes of evaluating each receivable on a specific basis for collectability using historical experience and adjusted for forward looking information, would appropriately allow the Trust to determine if there are significant increases in credit risk to then record a corresponding ECL allowance.

Hedge accounting:

IFRS 9 also introduces a new hedge accounting model that expands the scope of hedge items and risks eligible for hedge accounting and aligns hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness; however, it will provide for more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. Special transitional requirements have been set for the application of the new general hedging model.

Financial Liabilities:

Generally, IFRS 9 does not introduce changes to the classification of financial liabilities. The Trust will continue to measure its financial liabilities at amortized cost.

In regards to term modifications for financial liabilities, IFRS 9 requires that when a financial liability measured at amortized cost is modified or exchanged, and such modification or exchange does not result in derecognition, the adjustment to the amortized cost of the financial liability is recognized in profit or loss.

IFRS 15,Revenue from Contracts with Customers

In May 2014, the IASB issued IFRS 15,Revenue from Contracts with Customers ("IFRS 15") which replaces IAS 18,Revenue and IAS 11,Construction Contracts effective January 1, 2018. The objective of IFRS 15 is to establish the principles that the Trust will apply to report useful information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. The Trust is currently evaluating the adoption method for applying the new standard to prior periods.

The Trust is in the final stages of its evaluation of the impact of this standard on its combined financial statements. As the Trust's most material revenue stream of rental revenue is outside the scope of the new standard, the adoption of the new standard is not expected to have a material impact on the combined statements of income and comprehensive income. The Trust has concluded that the pattern of revenue recognition will remain unchanged. However, the Trust will be required to disclose the separate components of each revenue stream, including those included within gross leases, to the combined financial statements. Further, in respect of the Trust's net leases where the tenant is responsible for direct payment of both property taxes and insurance, because the Trust is the beneficiary, the amounts of expense and related revenue for these amounts will be presented on a gross basis in the statement of income and comprehensive income. There is no impact to net income or unitholders equity. In addition, no impact to the combined statement of cash flow is expected from adoption.

IFRS 16,Leases

In January 2016, the IASB issued IFRS 16,Leases ("IFRS 16") which replaces IAS 17,Leases and its associated interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls

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the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities that apply IFRS 15. The Trust does not expect this standard to have a significant impact on its combined financial statements as leases with tenants are expected to be accounted for as operating leases in the same manner they are currently being reported. The Trust has two investment properties located on land that is leased. Currently, the ground rent payments are expensed. It is expected that under IFRS 16, a right-of-use asset addition to investment properties and a lease obligation liability will be recorded with associated financing charges. The Trust also has rent expense associated with office space in Toronto, Canada and Vienna, Austria. A right-of-use asset addition and obligation liability will be recorded for these lease obligations as well.

IFRS 2,Share-based Payment

In June 2016, the IASB issued amendments to IFRS 2,Share-based Payment ("IFRS 2") clarifying how to account for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, share-based payment transactions with a net settlement feature and a modification to the terms and conditions that change the classification of the transactions. These amendments are effective for annual periods beginning on or after January 1, 2018. The Trust does not believe there will be a significant impact on the combined financial statements from adopting this standard.

IFRIC 23,Uncertainty over Income Tax Treatments

In June 2017, the IFRS Interpretations Committee issued IFRIC 23,Uncertainty over Income Tax Treatments ("IFRIC 23") which clarifies how the recognition and measurement requirements of IAS 12, Income Taxes, are applied where there is uncertainty over income tax treatments. This standard is effective for annual reporting periods beginning on or after January 1, 2019. The Trust is currently assessing the impact of IFRIC 23 on its combined financial statements.

IAS 40,Investment Properties

On December 8, 2016, the IASB issued an amendment to IAS 40,Investment Properties that requires an asset to be transferred to or from investment property only when there is a change in use. A change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. Granite will adopt these amendments and clarifications in its combined financial statements for the annual period beginning on January 1, 2018.

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3.    ACQUISITION

On October 6, 2017, the Trust acquired three income-producing properties in the United States. The following table summarizes the consideration paid for the acquisition and the fair value of the assets acquired and liabilities assumed at the acquisition date:

	Total
Purchase consideration:	​			​
Cash sourced from credit facility	​	$	117,227	​
Cash on hand	​	36,752		​
Total cash consideration paid		$	153,979	​
Recognized amounts of identifiable assets acquired and liabilities assumed measured at their respective fair values:	​			​
Investment properties	​	$	154,726	​
Working capital	​	(747		)
Total identifiable net assets		$	153,979	​

From the date of acquisition, the Trust recognized revenue of $2.8 million and net income of $1.6 million related to the aforementioned acquisition. Had this acquisition occurred on January 1, 2017, the Trust would have recognized approximately $10.4 million (pro-forma) of revenue and $7.0 million (pro-forma) of net income during the year ended December 31, 2017. The Trust incurred legal and advisory costs of $0.5 million associated with the acquisition, which are included in acquisition transaction costs in the combined statements of income. The Trust incurred an additional $0.2 million of costs related to pursuing other acquisition opportunities. These costs are also included in acquisition transaction costs in the combined statements of income.

4.    INVESTMENT PROPERTIES

As at December 31,	2017		2016
Income-Producing Properties	$	2,714,684	$	2,646,292
Land Held For Development	18,884		6,803
	$	2,733,568	$	2,653,095

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Changes in investment properties are shown in the following table:

Years ended December 31,	2017									2016
	Income- Producing Properties			Properties and Land Under Development			Land Held For Development			Income- Producing Properties			Properties and Land Under Development				Land Held For Development
Balance, beginning of year	$	2,646,292	​		$	—		$	6,803	$	2,576,562	​	​	$	8,651	​	​	$	7,173	​
Additions			​	​			​					​	​			​	​			​
— Capital expenditures:			​	​			​					​	​			​	​			​
Maintenance or improvements	21,065		​	​	—		​	—		2,089		​	​	—		​	​	—		​
Developments or expansions	72,774		​	​	—		​	—		8,224		​	​	5,826		​	​	—		​
— Acquisition (note 3)	154,726		​	​	—		​	—		—		​	​	—		​	​	—		​
— Transfer to land held for development	(12,076		)	​	—		​	12,076		—		​	​	—		​	​	—		​
— Completed projects	—		​	​	—		​	—		13,685		​	​	(13,685		)	​	—		​
— Leasing commissions	3,573		​	​	—		​	—		2,058		​	​	—		​	​	—		​
— Tenant incentives	803		​	​	—		​	—		1,458		​	​	—		​	​	—		​
Fair value gains, net	212,106		​	​	—		​	—		175,924		​	​	—		​	​	—		​
Foreign currency translation, net	12,800		​	​	—		​	5		(89,096		)	​	(792		)	​	(370		)
Disposals	—		​	​	—		​	—		(42,014		)	​	—		​	​	—		​
Amortization of straight-line rent	(1,101		)	​	—		​	—		371		​	​	—		​	​	—		​
Amortization of tenant incentives	(5,410		)	​	—		​	—		(5,229		)	​	—		​	​	—		​
Other changes	585		​	​	—		​	—		2,260		​	​	—		​	​	—		​
Classified as assets held for sale (note 5)	(391,453		)	​	—		​	—		—		​	​	—		​	​	—		​
Balance, end of year	$	2,714,684	​		$	—		$	18,884	$	2,646,292	​	​	$	—	​	​	$	6,803	​

During the year ended December 31, 2017, the Trust incurred $0.4 million of costs associated with 10 properties held for sale and disposed of in January 2018 (note 5) which are included in loss on sale of investment properties on the combined statements of income. During the year ended December 31, 2016, the Trust disposed of seven income-producing properties located in the United States, Austria and Germany for aggregate gross proceeds of $42.0 million and incurred a $2.4 million loss on disposal due to the associated selling costs. The fair value gains during the year ended December 31, 2016, excluding properties sold in the year, was $170.7 million.

The Trust determines the fair value of an income-producing property based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions and lease renewals at the applicable balance sheet dates, less future cash outflows in respect of such leases. Fair values are primarily determined by discounting the expected future cash flows, generally over a term of 10 years, plus 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. 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 external appraisals as data points, together with other external market information accumulated by management, in arriving at its own conclusions on values. Management uses valuation assumptions such as discount rates, terminal capitalization rates and market rental rates applied in external appraisals or sourced from valuation experts; however, the Trust also uses its historical renewal experience with tenants, its direct knowledge of the specialized nature of Granite's portfolio and tenant profile and its knowledge of the actual condition of the

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properties in making business judgments about lease renewal probabilities, renewal rents and capital expenditures. There has been no change in the valuation methodology during the year.

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

Valuations are most sensitive to changes in discount rates and terminal capitalization rates. The key valuation metrics for income-producing properties by country are set out below:

As at December 31,	2017(1)						2016
	Maximum		Minimum		Weighted average(2)		Maximum		Minimum		Weighted average(2)
Canada	​		​		​		​		​		​
Discount rate	​	8.25%	​	6.50%	​	6.84%	​	8.25%	​	6.50%	​	7.17%
Terminal capitalization rate	​	8.00%	​	5.75%	​	6.17%	​	8.00%	​	5.75%	​	6.68%
United States	​		​		​		​		​		​
Discount rate	​	11.00%	​	6.25%	​	7.68%	​	10.75%	​	6.25%	​	7.88%
Terminal capitalization rate	​	10.75%	​	5.75%	​	7.30%	​	11.25%	​	5.75%	​	7.69%
Germany	​		​		​		​		​		​
Discount rate	​	9.00%	​	6.50%	​	7.89%	​	9.00%	​	7.00%	​	8.03%
Terminal capitalization rate	​	9.50%	​	5.75%	​	7.91%	​	9.50%	​	5.75%	​	8.06%
Austria	​		​		​		​		​		​
Discount rate	​	10.00%	​	7.75%	​	8.05%	​	9.00%	​	8.00%	​	8.33%
Terminal capitalization rate	​	9.50%	​	8.25%	​	8.53%	​	9.50%	​	8.50%	​	8.83%
Netherlands	​		​		​		​		​		​
Discount rate	​	7.00%	​	6.25%	​	6.62%	​	7.50%	​	6.85%	​	7.09%
Terminal capitalization rate	​	7.30%	​	7.05%	​	7.17%	​	7.30%	​	7.15%	​	7.23%
Other	​		​		​		​		​		​
Discount rate	​	9.85%	​	7.25%	​	8.62%	​	10.00%	​	9.00%	​	9.69%
Terminal capitalization rate	​	10.00%	​	6.75%	​	8.39%	​	10.50%	​	7.35%	​	9.79%
Total	​		​		​		​		​		​
Discount rate	​	11.00%	​	6.25%	​	7.59%	​	10.75%	​	6.25%	​	7.80%
Terminal capitalization rate	​	10.75%	​	5.75%	​	7.48%	​	11.25%	​	5.75%	​	7.74%

⁽¹⁾

Excludes properties held for sale (note 5).

⁽²⁾

Weighted based on income-producing property fair value.

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The table below summarizes the sensitivity of the fair value of investment properties to changes in either the discount rate or terminal capitalization rate:

	Discount Rate						Terminal Capitalization Rate
Rate sensitivity	Fair value		Change in fair value				Fair value		Change in fair value
+50 basis points	$	2,640,364	​	$	(93,204	)	$	2,648,843	​	$	(84,725	)
+25 basis points	2,686,415		​	(47,153		)	2,690,533		​	(43,035		)
Base rate	2,733,568		​	—		​	2,733,568		​	—		​
–25 basis points	2,781,853		​	48,285		​	2,783,184		​	49,616		​
–50 basis points	2,831,301		​	97,733		​	2,834,883		​	101,315		​

Included in investment properties is $9.8 million (2016 — $11.3 million) of net straight-line rent receivable arising from the recognition of rental revenue on a straight-line basis over the lease term.

Details about contractual obligations to purchase, construct and develop properties can be found in the commitments and contingencies note (note 20).

Tenant minimum rental commitments payable to Granite on non-cancellable operating leases (excluding properties held for sale) are as follows:

Not later than 1 year	$	202,293
Later than 1 year and not later than 5 years	655,288
Later than 5 years	538,202
	$	1,395,783

5.    ASSETS HELD FOR SALE

At December 31, 2017, 10 investment properties located in Canada and the United States were classified as assets held for sale. On January 30, 2018, the income-producing property in Bowling Green, Kentucky, and two income-producing properties in St. Thomas, Ontario were sold for gross proceeds of approximately $328 million (US$ 262.3 million). On January 31, 2018, seven income-producing properties in Newmarket, Ontario were sold for gross proceeds of $63.0 million.

During the year ended December 31, 2017, Granite incurred $0.4 million of legal and advisory costs associated with the planned disposal of the investment properties held for sale which is included in loss on sale of investment properties on the combined statements of income.

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6.    UNSECURED DEBENTURES, NET AND CROSS CURRENCY INTEREST RATE SWAPS

(a)

Unsecured Debentures, Net

As at December 31,		2017						2016
	Maturity Date	Amortized Cost			Principal issued and outstanding			Amortized Cost			Principal issued and outstanding
3.788% Debentures	July 5, 2021		$	249,201		$	250,000	​	$	248,979	​	$	250,000
3.873% Debentures	November 30, 2023	​	398,105		​	400,000		​	397,789		​	400,000
			$	647,306		$	650,000	​	$	646,768	​	$	650,000

3.788% Debentures

On July 3, 2014, Granite REIT Holdings Limited Partnership ("Granite LP"), a wholly-owned subsidiary of Granite, issued at par $250.0 million aggregate principal amount of 3.788% Series 2 senior debentures due July 5, 2021 (the "2021 Debentures"). Interest on the 2021 Debentures is payable semi-annually in arrears on January 5 and July 5 of each year. The unamortized portion of the $1.6 million of expenses incurred in connection with the issuance of the 2021 Debentures is presented as a reduction of the carrying amount of the 2021 Debentures.

The 2021 Debentures are redeemable, in whole or in part, at Granite's option at any time and from time to time, at a price equal to accrued and unpaid interest plus the greater of (a) 100% of the principal amount of the 2021 Debentures to be redeemed; and (b) the Canada Yield Price. The Canada Yield Price means, in respect of a 2021 Debenture, a price equal to which, if the 2021 Debenture were to be issued at such price on the redemption date, would provide a yield thereon from the redemption date to its maturity date equal to 46.0 basis points above the yield that a non-callable Government of Canada bond, trading at par, would carry if issued on the redemption date with a maturity date of July 5, 2021. Granite also has the option to redeem the 2021 Debentures at par plus any accrued and unpaid interest within 30 days of the maturity date of July 5, 2021.

3.873% Debentures

On December 20, 2016, Granite LP issued $400.0 million aggregate principal amount of 3.873% Series 3 senior debentures due November 30, 2023 (the "2023 Debentures") at a nominal premium. Interest on the 2023 Debentures is payable semi-annually in arrears on May 30 and November 30 of each year. The unamortized portion of the $2.2 million of expenses incurred in connection with the issuance of the 2023 Debentures is presented as a reduction of the carrying amount of the 2023 Debentures.

The 2023 Debentures are redeemable, in whole or in part, at Granite's option at any time and from time to time, at a price equal to accrued and unpaid interest plus the greater of (a) 100% of the principal amount of the 2023 Debentures to be redeemed; and (b) the Canada Yield Price. The Canada Yield Price means, in respect of a 2023 Debenture, a price equal to which, if the 2023 Debenture were to be issued at such price on the redemption date, would provide a yield thereon from the redemption date to its maturity date equal to 62.5 basis points above the yield that a non-callable Government of Canada bond, trading at par, would carry if issued on the redemption date with a maturity date of November 30, 2023. Granite also has the option to redeem the 2023 Debentures at par plus any accrued and unpaid interest within 30 days of the maturity date of November 30, 2023.

The 2021 Debentures and 2023 Debentures rank equally with all of the Trust's existing and future unsubordinated and unsecured indebtedness and are guaranteed by Granite REIT and Granite GP.

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(b)

Cross Currency Interest Rate Swaps

As at December 31,	2017		2016
Financial liability
2021 Cross Currency Interest Rate Swap — fair value	$	19,429	$	443
2023 Cross Currency Interest Rate Swap — fair value	42,037		10,198
	$	61,466	$	10,641

On July 3, 2014, the Trust entered into a cross currency interest rate swap (the "2021 Cross Currency Interest Rate Swap") to exchange the 3.788% interest payments from the 2021 Debentures for euro denominated payments at a 2.68% interest rate. In addition, under the terms of the swap, the Trust will pay principal proceeds of €171.9 million for $250.0 million on July 5, 2021.

On December 20, 2016, the Trust entered into a cross currency interest rate swap (the "2023 Cross Currency Interest Rate Swap") to exchange the 3.873% interest payments from the 2023 Debentures for euro denominated payments at a 2.43% interest rate. In addition, under the terms of the swap, the Trust will pay principal proceeds of €281.1 million for $400.0 million on November 30, 2023.

The cross currency interest rate swaps are designated as net investment hedges of the Trust's investment in foreign operations. The effectiveness of the hedges are assessed quarterly. For the year ended December 31, 2017, the Trust has assessed that the hedges continued to be effective. As an effective hedge, the fair value gains or losses on the cross currency interest rate swaps are recognized in other comprehensive income (loss). The Trust has elected to record the differences resulting from the lower interest rate associated with the cross currency interest rate swaps in the statement of income.

(c)

Redemption of Debentures

On December 21, 2016, Granite LP redeemed all of the $200.0 million aggregate principal amount outstanding of 4.613% Series 1 senior debentures due October 2, 2018 (the "2018 Debentures") for an aggregate redemption price of $213.2 million, which included accrued and unpaid interest to December 21, 2016 of $2.0 million. In the year ended December 31, 2016, the Trust recorded early redemption costs of $11.9 million, consisting of a redemption premium of $11.2 million and $0.7 million of accelerated amortization of issuance costs.

Due to the early redemption of the 2018 Debentures, the Trust settled the associated cross currency interest rate swap with a payment of $1.2 million that included $1.7 million related to the fair value of the principal proceeds less $0.5 million of interest rate swap savings.

7.    OTHER LIABILITY

As at December 31, 2017, the other liability consists of a tenant allowance payable of $9.0 million (2016 — $7.8 million). This tenant allowance payable of €6.0 million is due in 2018 and relates to a 2014 lease extension at the Eurostar facility in Graz, Austria. The payable of €6.0 million was discounted and is being accreted to its face value through a charge to interest expense. During the year ended December 31, 2017, the liability increased by the accretion charge of $0.7 million and foreign exchange translation of $0.5 million. On February 2, 2018, the €6.0 million allowance was paid to the tenant.

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8.    BANK INDEBTEDNESS

As at December 31, 2017, Granite LP had an unsecured senior revolving credit facility in the amount of $250.0 million that was available by way of Canadian dollar, US dollar or euro denominated loans or letters of credit (the "Credit Facility"). Interest on drawn amounts was calculated based on an applicable margin determined by the Trust's external credit rating. The Credit Facility was guaranteed by Granite REIT and Granite GP and would have matured on February 1, 2019 had Granite LP not entered into a new credit facility as noted below. At December 31, 2017, Granite LP had $32.6 million (US$ 26.0 million) (2016 — nil) drawn under the Credit Facility and $0.2 million (2016 — $0.2 million) in letters of credit issued against the Credit Facility.

Subsequent to December 31, 2017, Granite LP entered into a new unsecured revolving credit facility in the amount of $500.0 million that is available by way of Canadian dollar, US dollar or euro denominated loans or letters of credit and matures on February 1, 2023. The Trust has the option to extend the maturity date by one year to February 1, 2024, subject to the agreement of lenders in respect of a minimum of 66²/3% of the aggregate amount committed under the new facility. The new facility provides the Trust with the ability to increase the amount of the commitment by an additional aggregate principal amount of up to $100.0 million with the consent of the participating lenders. Interest on drawn amounts is calculated based on an applicable margin determined by reference to the external credit rating of Granite REIT and Granite GP, as is a commitment fee in respect of undrawn amounts. The new facility is guaranteed by Granite REIT and Granite GP.

9.    CURRENT ASSETS AND CURRENT LIABILITIES

Prepaid Expenses and Other

As at December 31, 2017, prepaid expenses and other assets primarily includes unrealized gains on foreign exchange forward contracts of $0.7 million (2016 — $1.5 million), and prepaid insurance premiums of $0.6 million (2016 — $0.5 million).

Deferred Revenue

Deferred revenue relates to prepaid and unearned revenue received from tenants and fluctuates with the timing of rental receipts.

Accounts Payable and Accrued Liabilities

As at December 31,	2017		2016
Accounts payable	$	5,676	$	5,660
Accrued salaries, incentives and severance	4,304		5,161
Accrued interest payable	6,016		5,201
Accrued construction payable	12,622		1,922
Accrued professional fees	2,434		2,283
Accrued employee unit-based compensation	3,416		1,474
Accrued trustee/director unit-based compensation	1,367		6,568
Accrued property operating costs	3,110		499
Other accrued liabilities	4,397		2,697
	$	43,342	$	31,465

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10.  DISTRIBUTIONS TO STAPLED UNITHOLDERS

Total distributions declared to stapled unitholders in the year ended December 31, 2017 were $123.1 million (2016 — $114.3 million) or $2.61 per stapled unit (2016 — $2.43 per stapled unit). Distributions payable at December 31, 2017 of $10.6 million, representing the December 2017 distribution, were paid on January 16, 2018. The distribution declared in January 2018 in the amount of $10.6 million was paid on February 15, 2018 and the distribution declared in February 2018 of $10.5 million will be paid on March 15, 2018.

11.  EQUITY

Stapled Unitholders' Equity

(a)

Stapled Units

The stapled units consist of one unit of Granite REIT and one common share of Granite GP. Granite REIT is authorized to issue an unlimited number of units. Granite GP's authorized share capital consists of an unlimited number of common shares without par value. Each stapled unit is entitled to distributions and/or dividends in the case of Granite GP as and when declared and, in the event of termination of Granite REIT and Granite GP, to the net assets of Granite REIT and Granite GP remaining after satisfaction of all liabilities.

(b)

Unit-Based Compensation

Incentive Stock Option Plan

The Incentive Stock Option Plan (the "Option Plan") allows for the grant of stock options or appreciation rights to directors, officers, employees and consultants. As at December 31, 2017 and December 31, 2016, there were no options outstanding under this plan. No options have been granted since August 2010.

Director/Trustee Deferred Share Unit Plan

Effective November 3, 2003, Granite Co. established a Non-Employee Director Share-Based Compensation Plan (the "DSP"), which provides for a deferral of up to 100% of each non-employee director's total annual remuneration, at specified levels elected by each director, until such director ceases to be a director. In connection with the REIT conversion (note 1), effective January 3, 2013, the DSP was amended to entitle the holder to receive a payment based on the fair market value of a preferred share of Granite Co. that is equal in value to a stapled unit of the Trust. In addition, effective January 3, 2013, a new deferred share unit plan (the "new DSP") was established by Granite GP whereby each non-employee director/trustee is entitled to receive a portion of their annual retainer (and to elect to receive up to 100% of their annual remuneration) as deferred share units, which entitles them to receive a payment based on the fair market value of a preferred share of Granite Co. that is equal in value to a stapled unit.

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

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

	2017						2016
	Number (000s)			Weighted Average Grant Date Fair Value			Number (000s)			Weighted Average Grant Date Fair Value
DSUs outstanding, January 1	​	147	​		$	35.43	​	135	​	​	$	35.51
Granted	​	23	​	​	48.75		​	28	​	​	40.27
Settled	​	(142	)	​	50.81		​	(16	)	​	44.44
DSUs outstanding, December 31	​	28	​		$	41.88	​	147	​	​	$	35.43

Executive Deferred Stapled Unit Plan

The Executive Share Unit Plan (the "Stapled Unit Plan") is designed to provide equity-based compensation in the form of stapled units to executives and other employees (the "Participants"). The maximum number of stapled units which may be issued pursuant to the Stapled Unit Plan is 1.0 million. The Stapled Unit Plan entitles a Participant to receive a stapled unit or a cash payment equal to the market value of the stapled unit, which on any date is the volume weighted average trading price of a stapled unit on the Toronto Stock Exchange or New York Stock Exchange over the preceding five trading days. The form of redemption of the stapled units is determined by the Compensation, Governance and Nominating Committee and is not at the option of the Participant. Vesting conditions in respect of a grant are determined by the Compensation, Governance and Nominating Committee at the time the grant is made and may result in the vesting of more or less than 100% of the number of stapled units. The Stapled Unit Plan also provides for the accrual of distribution equivalent amounts based on distributions paid on the stapled units. Stapled units are, unless otherwise agreed or otherwise required by the Stapled Unit Plan, settled within 60 days following vesting.

A reconciliation of the changes in stapled units outstanding under the Stapled Unit Plan is presented below:

	2017						2016
	Number (000s)			Weighted Average Grant Date Fair Value			Number (000s)			Weighted Average Grant Date Fair Value
Stapled units outstanding, January 1	​	82	​		$	42.34	​	72	​	​	$	41.03
New grants	​	49	​	​	45.81		​	67	​	​	40.61
Forfeited(1)	​	(3	)	​	45.23		​	—	​	​	37.33
Settled(2)	​	(22	)	​	45.36		​	(57	)	​	38.24
Stapled units outstanding, December 31	​	106	​		$	43.32	​	82	​	​	$	42.34

⁽¹⁾

Three thousand stapled units (2016 — 198 stapled units) were forfeited during the year ended December 31, 2017.

⁽²⁾

22 thousand stapled units (2016 — 57 thousand stapled units) were settled during the year ended December 31, 2017.

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The Trust's unit-based compensation expense recognized in general and administrative expenses was:

Years ended December 31,	2017		2016
DSPs for trustees/directors	$	2,001	$	2,078
Stapled Unit Plan for employees	2,911		1,330
Option Plan	—		274
Unit-based compensation expense	$	4,912	$	3,682
Fair value remeasurement expense included in the above	$	1,237	$	1,361

(c)

Normal Course Issuer Bid

On May 11, 2017, Granite announced the acceptance by the Toronto Stock Exchange ("TSX") of Granite's Notice of Intention to Make a Normal Course Issuer Bid ("NCIB"). Pursuant to the NCIB, Granite proposes to purchase through the facilities of the TSX and any alternative trading system in Canada, from time to time and if considered advisable, up to an aggregate of 4,118,757 of Granite's issued and outstanding stapled units. The NCIB commenced on May 16, 2017 and will conclude on the earlier of the date on which purchases under the bid have been completed and May 15, 2018. Pursuant to the policies of the TSX, daily purchases made by Granite through the TSX may not exceed 26,267 stapled units, subject to certain exceptions. Granite entered into an automatic securities purchase plan with a broker in order to facilitate repurchases of the stapled units under the NCIB during specified blackout periods. As at December 31, 2017, Granite has repurchased 241,034 stapled units for consideration of $12.0 million. The $1.2 million difference between the repurchase price and the average cost of the stapled units was charged to contributed surplus. An additional 891,440 units for consideration of $43.9 million were repurchased subsequent to the year-end and as of March 1, 2018.

(d)

Accumulated Other Comprehensive Income

Accumulated other comprehensive income consists of the following:

As at December 31,	2017			2016
Foreign currency translation gains on investments in subsidiaries, net of related hedging activities and non-controlling interests(1)	$	183,729	​	$	167,684	​
Fair value losses on derivatives designated as net investment hedges	(65,163		)	(13,950		)
	$	118,566	​	$	153,734	​

⁽¹⁾

Includes foreign currency translation gains and losses from non-derivative financial instruments designated as net investment hedges.

Non-Controlling Interests

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

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

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12.  COSTS AND EXPENSES (INCOME)

(a)

Property operating costs consist of:

Years ended December 31,	2017		2016
Non-recoverable from tenants:
Property taxes and utilities	$	1,035	$	747
Legal	324		348
Consulting	379		482
Environmental and appraisals	708		477
Repairs and maintenance	659		465
Ground rents	628		628
Other	653		660
	4,386		3,807
Recoverable from tenants:
Property taxes and utilities	2,644		2,209
Repairs and maintenance	749		531
Property management fees	741		592
Other	780		499
	4,914		3,831
Property operating costs	$	9,300	$	7,638

(b)

General and administrative expenses consist of:

Years ended December 31,	2017		2016
Salaries and benefits	$	12,113	$	13,332
Audit, legal and consulting	3,382		4,807
Trustee/director fees and related expenses	1,438		1,673
Unit-based compensation including distributions and revaluations	4,017		2,921
Other public entity costs	1,687		1,564
Office rents	901		905
Other	2,528		2,758
	$	26,066	$	27,960

(c)

Proxy contest expenses

In connection with the proxy contest that preceded the June 2017 annual general meeting ("AGM"), Granite incurred $5.9 million of expenses in the year ended December 31, 2017. Included in the proxy contest expenses are legal, advisory and proxy solicitation costs incurred directly by Granite and a $2.0 million reimbursement of out-of-pocket fees and expenses incurred by Front Four Capital Group and Sandpiper Group regarding matters relating to the AGM. Sandpiper Group received $0.7 million of the reimbursement. An individual affiliated with Sandpiper Group is a related party of Granite by virtue of becoming a director of Granite GP and a trustee of Granite REIT.

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(d)

Interest expense and other financing costs, net consist of:

Years ended December 31,	2017			2016
Interest and amortized issuance costs relating to debentures	$	17,416	​	$	14,800	​
Interest on mortgages payable and construction loans	—		​	3,057		​
Amortization of deferred financing costs	219		​	193		​
Other interest and accretion charges	2,376		​	1,946		​
	20,011		​	19,996		​
Capitalized interest	—		​	(91		)
Interest income	(540		)	(318		)
	$	19,471	​	$	19,587	​

(e)

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

Years ended December 31,	2017		2016
Foreign exchange forward contracts, net	$	823	$	(2,394	)
Interest rate caps	—		79		​
Contingent consideration	—		3,465		​
	$	823	$	1,150	​

Contingent consideration was recognized in connection with acquisitions completed in 2013. During 2016, with the properties fully leased and the increases in the fair value of the properties acquired, the contingent consideration obligation was increased by $3.5 million to reflect these changes in the valuation assumptions. Concurrent with the acquisition of the non-controlling interests in November 2016 (note 11), the contingent consideration recognized of $8.8 million (US$ 6.6 million) was paid.

13.  INCOME TAXES

(a)

The major components of the income tax expense are:

Years ended December 31,	2017			2016
Current income tax:			​			​
Current taxes	$	6,503	​	$	7,873	​
Current taxes referring to previous periods	228		​	(1,686		)
Withholding taxes and other	978		​	694		​
	$	7,709	​	$	6,881	​
Deferred income tax:			​			​
Origination and reversal of temporary differences	$	42,250	​	$	39,774	​
Impact of changes in tax rates	(35,047		)	(55		)
Withholding taxes on profits of subsidiaries	(629		)	120		​
Other	(865		)	905		​
	$	5,709	​	$	40,744	​
Income tax expense	$	13,418	​	$	47,625	​

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For the year ended December 31, 2017, there was no current tax expense associated with property dispositions. For the year ended December 31, 2016, current tax expense includes $2.3 million of expense associated with the disposition of properties in Germany and the United States and a $1.0 million current tax recovery associated with the disposition of a property in Austria.

(b)

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

Years ended December 31,	2017			2016
Income before income taxes	$	371,166	​	​	$	328,317	​
Expected income taxes at the Canadian statutory tax rate of 26.5% (2016 — 26.5%)	$	98,359	​	​	$	87,004	​
Income distributed and taxable to unitholders	(50,005		)	​	(53,039		)
Net foreign rate differentials	(3,708		)	​	9,152		​
Net change in provisions for uncertain tax positions	1,762		​	​	825		​
Net permanent differences	1,947		​	​	2,229		​
Net effect of change in tax rates	(35,047		)	​	(55		)
Withholding taxes and other	110		​	​	1,509		​
Income tax expense	$	13,418	​	​	$	47,625	​

On December 22, 2017, the US tax legislation commonly known as the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. Recognition of the tax effects of the Tax Act is required in the interim and annual periods that include December 22, 2017. The key impact of the Tax Act that affects the Trust's year ended December 31, 2017 was a change in the federal corporate tax rate to 21% compared to a maximum of 35%.

As a result of the reduction in the federal corporate tax rate to 21% under the Tax Act, the Trust's deferred tax liability was reduced by $35.0 million for the year ended December 31, 2017.

(c)

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

As at December 31,	2017		2016
Deferred tax assets:
Investment properties	$	11	$	1,249
Eligible capital expenditures	2,625		2,822
Other	3,106		2,328
Deferred tax assets	$	5,742	$	6,399
Deferred tax liabilities:
Investment properties	$	243,357	$	237,159
Withholding tax on undistributed subsidiary profits	512		1,092
Other	183		—
Deferred tax liabilities	$	244,052	$	238,251

(d)

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

Years ended December 31,	2017		2016
Balance, beginning of year	$	231,852	$	200,190	​
Deferred tax expense recognized in net income	5,709		40,744		​
Foreign currency translation of deferred tax balances	749		(9,082		)
Net deferred tax liabilities, end of year	$	238,310	$	231,852	​

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(e)

Net cash payments of income taxes amounted to a payment of $3.5 million for the year ended December 31, 2017 (2016 — $0.2 million) which included $1.0 million of withholding taxes paid (2016 — $0.7 million).

(f)

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

As at December 31, 2017, the Trust had $12.0 million (2016 — $10.1 million) of unrecognized income tax benefits, (including $0.2 million (2016 — $0.2 million) related to accrued interest and penalties), all of which could ultimately reduce the Trust's effective tax rate should these tax benefits become recognized. The Trust believes that it has adequately provided for reasonably foreseeable outcomes related to tax examinations and that any resolution will not have a material effect on the combined financial position, results of operations or cash flows. However, the Trust cannot predict with any level of certainty the exact nature of any future possible outcome.

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

As at December 31,	2017			2016
Unrecognized tax benefits balance, beginning of year	$	10,143	​	$	11,883	​
Decreases for tax positions of prior years	(416		)	(3,066		)
Increases for tax positions of current year	1,727		​	1,979		​
Foreign currency impact	581		​	(653		)
Unrecognized tax benefits balance, end of year	$	12,035	​	$	10,143	​

It is reasonably possible that the gross unrecognized tax benefits, as of December 31, 2017, could decrease in the next 12 months. The quantum of the decrease could range between a nominal amount and $0.4 million (2016 — a nominal amount and $1.9 million) and relates primarily to tax years becoming statute barred for purposes of future tax examinations by local taxing authorities and the outcome of current tax examinations. For the year ended December 31, 2017, $0.1 million of interest and penalties was recorded (2016 — $0.1 million) as part of the provision for income taxes in the combined statements of income.

As at December 31, 2017, the following tax years remained subject to examination:

Major Jurisdictions
Canada	2012 through 2017
United States	2014 through 2017
Mexico	2011 through 2017
Austria	2013 through 2017
Germany	2012 through 2017
Netherlands	2013 through 2017

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As at December 31, 2017, the Trust had approximately $327.8 million of Canadian capital loss carryforwards that do not expire and other losses and deductible temporary differences in various tax jurisdictions of approximately $25.2 million. The Trust believes it is not probable that these tax assets can be realized; and accordingly, no related deferred tax asset was recognized at December 31, 2017.

14.  SEGMENTED DISCLOSURE INFORMATION

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

Revenue

Years ended December 31,	2017		2016
Canada	$	58,484	$	62,733
United States	66,774		63,515
Austria	60,328		60,285
Germany	22,271		23,091
Netherlands	9,577		9,515
Other Europe	5,204		4,262
	$	222,638	$	223,401

For the year ended December 31, 2017, revenue from Magna comprised approximately 74% (2016 — 76%) of the Trust's total revenue.

Investment properties

As at December 31,	2017		2016
Canada	$	621,003	$	763,701
United States	874,499		779,196
Austria	780,030		699,001
Germany	265,734		242,467
Netherlands	127,807		118,123
Other Europe	64,495		50,607
	$	2,733,568	$	2,653,095

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15.  DETAILS OF CASH FLOWS

(a)

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

Years ended December 31,	2017			2016
Straight-line rent amortization	$	1,101	​	$	(371	)
Tenant incentive amortization	5,410		​	5,236		​
Unit-based compensation expense (note 11(b))	4,912		​	3,682		​
Fair value gains on investment properties	(212,106		)	(175,924		)
Depreciation and amortization	335		​	707		​
Fair value losses on financial instruments	823		​	1,150		​
Loss on sale of investment properties	427		​	2,420		​
Amortization of issuance costs relating to debentures	542		​	1,749		​
Amortization of deferred financing costs	219		​	193		​
Deferred income taxes	5,709		​	40,744		​
Other	98		​	(1,450		)
	$	(192,530	)	$	(121,864	)

(b)

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

Years ended December 31,	2017			2016
Accounts receivable	$	(1,191	)	$	2,723	​
Prepaid expenses and other	(362		)	333		​
Accounts payable and accrued liabilities	(4,681		)	(2,448		)
Deferred revenue	(1,411		)	(1,376		)
Restricted cash	48		​	727		​
	$	(7,597	)	$	(41	)

(c)

Non-cash financing activities

During the year ended December 31, 2017, 22 thousand stapled units (2016 — 56 thousand stapled units) with a value of $1.0 million (2016 — $2.1 million) were issued under the Stapled Unit Plan.

(d)

Cash and cash equivalents consists of:

Years ended December 31,	2017		2016
Cash	$	55,608	$	109,414
Short-term deposits	13,411		136,801
	$	69,019	$	246,215

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16.  FAIR VALUE AND RISK MANAGEMENT

(a)

Fair Value of Financial Instruments

The following table provides the classification and measurement of financial assets and liabilities as at December 31, 2017:

	Fair value through profit or loss				Loans and receivables / other financial liabilities							Total		Total
Measurement basis	Fair value				Amortized cost				Fair value			Carrying Value		Fair Value
Financial assets	​			​	​			​	​					​
Other assets		$	—	​		$	455	(1)		$	455	$	455		$	455
Accounts receivable	​	—		​	​	2,310		​	​	2,310		2,310		​	2,310
Prepaid expenses and other	​	705		(2)	​	—		​	​	—		705		​	705
Restricted cash	​	—		​	​	515		​	​	515		515		​	515
Cash and cash equivalents	​	—		​	​	69,019		​	​	69,019		69,019		​	69,019
		$	705	​		$	72,299	​		$	72,299	$	73,004		$	73,004
Financial liabilities	​			​	​			​	​					​
Unsecured debentures, net		$	—	​		$	647,306	​		$	655,035	$	647,306		$	655,035
Cross currency interest rate swaps	​	61,466		​	​	—		​	​	—		61,466		​	61,466
Other liability	​	8,968		​	​	—		​	​	—		8,968		​	8,968
Bank indebtedness	​	—		​	​	32,552		​	​	32,552		32,552		​	32,552
Accounts payable and accrued liabilities	​	42		(3)	​	43,300		​	​	43,300		43,342		​	43,342
Distributions payable	​	—		​	​	10,647		​	​	10,647		10,647		​	10,647
		$	70,476	​		$	733,805	​		$	741,534	$	804,281		$	812,010

⁽¹⁾

Long-term receivables included in other assets.

⁽²⁾

Foreign exchange forward contracts included in prepaid expenses.

⁽³⁾

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

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The following table provides the classification and measurement of financial assets and liabilities as at December 31, 2016:

	Fair value through profit or loss				Loans and receivables / other financial liabilities							Total		Total
Measurement basis	Fair value				Amortized cost				Fair value			Carrying Value		Fair Value
Financial assets	​			​	​			​	​					​
Other assets	​	$	—	​	​	$	530	(4)	​	$	530	$	530	​	$	530
Accounts receivable	​	—		​	​	1,066		​	​	1,066		1,066		​	1,066
Prepaid expenses and other	​	1,486		(5)	​	—		​	​	—		1,486		​	1,486
Restricted cash	​	—		​	​	563		​	​	563		563		​	563
Cash and cash equivalents	​	—		​	​	246,215		​	​	246,215		246,215		​	246,215
		$	1,486	​		$	248,374	​		$	248,374	$	249,860		$	249,860
Financial liabilities	​			​	​			​	​					​
Unsecured debentures, net	​	$	—	​	​	$	646,768	​	​	$	658,325	$	646,768	​	$	658,325
Cross currency interest rate swaps	​	10,641		​	​	—		​	​	—		10,641		​	10,641
Other liability	​	7,777		​	​	—		​	​	—		7,777		​	7,777
Accounts payable and accrued liabilities	​	—		​	​	31,465		​	​	31,465		31,465		​	31,465
Distributions payable	​	—		​	​	10,226		​	​	10,226		10,226		​	10,226
		$	18,418	​		$	688,459	​		$	700,016	$	706,877		$	718,434

⁽⁴⁾

Long-term receivables included in other assets.

⁽⁵⁾

Foreign exchange forward contracts included in prepaid expenses.

The fair values of the Trust's accounts receivable, cash and cash equivalents, restricted cash, bank indebtedness, accounts payable and accrued liabilities and distributions payable approximate their carrying amounts due to the relatively short periods to maturity of these financial instruments. The fair value of the other liability approximates its carrying value as the liability is revalued at each reporting date. The fair values of the unsecured debentures are determined using quoted market prices. The fair values of the cross currency interest rate swaps are determined using market inputs quoted by their counterparties.

The Trust periodically purchases foreign exchange forward contracts to hedge specific anticipated foreign currency transactions and to mitigate its foreign exchange exposure on its net cash flows. At December 31, 2017, the Trust held 18 outstanding foreign exchange forward contracts (2016 — 13 contracts outstanding). The foreign exchange contracts are comprised of 12 contracts to purchase $39.6 million and sell €26.0 million, three contracts to purchase US$ 18.0 million and sell €15.0 million and three contracts to purchase €15.0 million and sell US$ 17.8 million. For the year ended December 31, 2017, the Trust recorded a net fair value loss of $0.8 million (2016 — net fair value gain of $2.4 million) on these outstanding foreign exchange forward contracts (note 12(e)).

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(b)

Fair Value Hierarchy

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

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

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

As at December 31, 2017	Level 1			Level 2			Level 3
ASSETS AND LIABILITIES MEASURED OR DISCLOSED AT FAIR VALUE			​			​
Assets measured at fair value			​			​
Investment properties	$	—	​	$	—	​	$	2,733,568
Assets held for sale	—		​	—		​	391,453
Foreign exchange forward contracts included in prepaid expenses and other	—		​	705		​	—
Liabilities measured or disclosed at fair value			​			​
Unsecured debentures, net	655,035		​	—		​	—
Cross currency interest rate swaps	—		​	61,466		​	—
Other liability	—		​	—		​	8,968
Bank indebtedness	—		​	32,552		​	—
Foreign exchange forward contracts included in accounts payable and accrued liabilities	—		​	42		​	—
Net assets (liabilities) measured or disclosed at fair value	$	(655,035	)	$	(93,355	)	$	3,116,053

As at December 31, 2016	Level 1			Level 2			Level 3
ASSETS AND LIABILITIES MEASURED OR DISCLOSED AT FAIR VALUE			​			​
Assets measured at fair value			​			​
Investment properties	$	—	​	$	—	​	$	2,653,095
Foreign exchange forward contracts included in prepaid expenses and other	—		​	1,486		​	—
Liabilities measured or disclosed at fair value			​			​
Unsecured debentures, net	658,325		​	—		​	—
Cross currency interest rate swaps	—		​	10,641		​	—
Other liability	—		​	—		​	7,777
Net assets (liabilities) measured or disclosed at fair value	$	(658,325	)	$	(9,155	)	$	2,645,318

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For assets and liabilities that are measured at fair value on a recurring basis, the Trust determines whether transfers between the levels of the fair value hierarchy have occurred by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the years ended December 31, 2017 and 2016, there were no transfers between the levels.

Refer to note 4, Investment Properties, for a description of the valuation techniques and inputs used in the fair value measurement and for a reconciliation of the fair value measurements of investment properties and assets held for sale recognized in Level 3 of the fair value hierarchy. Refer to note 7, Other Liability, for a description of the valuation techniques used in the fair value measurement of the liability in Level 3 of the fair value hierarchy.

(c)

Risk Management

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

(i)

Credit risk

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

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

Magna accounts for approximately 74% of the Trust's rental revenue. Although its operating subsidiaries are not individually rated, Magna International Inc. has an investment grade credit rating from Moody's, S&P and Dominion Bond Rating Service which mitigates the Trust's credit risk. Substantially all of the Trust's accounts receivable are collected within 30 days. The balance of accounts receivable past due is not significant.

(ii)

Interest rate risk

As at December 31, 2017, the Trust's exposure to interest rate risk is limited. Approximately 95% of the Trust's interest bearing debt consists of fixed rate debt in the form of the 2021 Debentures and the 2023 Debentures. These debentures, after taking into account the related cross currency interest rate swaps, have effective fixed interest rates of 2.68% and 2.43%, respectively. As a result, an insignificant amount of the Trust's debt is exposed to variable interest rate risk.

(iii)

Foreign exchange risk

As at December 31, 2017, the Trust is exposed to foreign exchange risk primarily in respect of movements in the euro and the US dollar. The Trust is structured such that its foreign operations are primarily conducted by entities with a functional currency which is the same as the economic environment in which the operations take place. As a result, the net income impact of currency risk associated with financial instruments is limited as its financial assets and liabilities are generally denominated in the functional currency of the subsidiary that holds the financial instrument. However, the Trust is exposed to foreign currency risk on its net investment in its foreign currency denominated operations and certain Trust level foreign currency denominated assets and liabilities. At December 31, 2017, the Trust's foreign currency denominated net assets are $1.9 billion primarily in US dollars and euros. A 1% change in the US dollar and euro exchange

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rates relative to the Canadian dollar would result in a gain or loss of approximately $9.5 million and $9.5 million, respectively, to comprehensive income.

Granite generates rental income that is not all denominated in Canadian dollars. Since the financial results are reported in Canadian dollars, the Trust is subject to foreign currency fluctuations that could, from time to time, have an impact on the operating results. For the year ended December 31, 2017, a 1% change in the US dollar and euro exchange rates relative to the Canadian dollar would have impacted revenue by approximately $0.7 million and $1.0 million, respectively.

For the year ended December 31, 2017, the Trust designated its US dollar borrowings under the Credit Facility as a hedge of its net investment in the U.S. operations. In addition, the Trust has designated its cross currency interest rate swaps relating to the $650.0 million of unsecured debentures as hedges of its net investment in the European operations (note 6(b)).

(iv)

Liquidity risk

Liquidity risk is the risk the Trust will encounter difficulties in meeting its financial obligations as they become due. The Trust may also be subject to the risks associated with debt financing, including the risks that the 2021 Debentures, 2023 Debentures and Credit Facility may not be able to be refinanced. The Trust's objectives in minimizing liquidity risk are to maintain prudent levels of leverage on its investment properties, staggering its debt maturity profile and maintaining investment grade credit ratings. In addition, the Declaration of Trust establishes certain debt ratio limits.

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

	Payments due by year
As at December 31, 2017	Total		2018		2019		2020		2021		2022		Thereafter
Unsecured debentures	$	650,000	$	—	$	—	$	—	$	250,000	$	—	​	$	400,000
Cross currency interest rate swaps	61,466		—		—		—		19,429		—		​	42,037
Bank indebtedness	32,552		—		—		—		—		—		​	32,552
Interest payments(1):													​
Unsecured debentures, net of cross currency interest rate swap savings	89,798		17,288		17,288		17,288		17,288		10,323		​	10,323
Bank indebtedness	4,799		944		944		944		944		944		​	79
Tenant allowance payable	9,029		9,029		—		—		—		—		​	—
Accounts payable and accrued liabilities	43,342		42,529		390		423		—		—		​	—
Distributions payable	10,647		10,647		—		—		—		—		​	—
	$	901,633	$	80,437	$	18,622	$	18,655	$	287,661	$	11,267	​	$	484,991

⁽¹⁾

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

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17.  CAPITAL MANAGEMENT

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

As at December 31,	2017		2016
Unsecured debentures, net	$	647,306	$	646,768
Cross currency interest rate swaps	61,466		10,641
Bank indebtedness	32,552		—
Total debt	741,324		657,409
Stapled unitholders' equity	2,136,614		1,948,207
Total managed capital	$	2,877,938	$	2,605,616

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

•

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

•

Compliance with existing debt covenants;

•

Maintaining investment grade credit ratings;

•

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

•

Generating stable and growing cash distributions; and

•

Building long-term unitholder value.

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

•

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

•

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

At December 31, 2017, the Trust's consolidated debt consists of the Credit Facility, the 2021 Debentures and the 2023 Debentures which have various financial covenants. These covenants are defined within the Credit Facility and the trust indenture and, depending on the debt instrument, include a total indebtedness ratio, a secured indebtedness ratio, an interest coverage ratio, an unencumbered asset ratio, and a minimum equity threshold. The Trust monitors these provisions and covenants and was in compliance with their respective requirements as at December 31, 2017.

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 2017, the Trust declared a monthly distribution of $0.217 per stapled unit from January to November and a monthly distribution of $0.227 per stapled unit for the month of December. The Board determined these distribution levels having considered, among other factors, estimated 2017 and 2018 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.

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18.  RELATED PARTY TRANSACTIONS

For the years ended December 31, 2017 and 2016, key management personnel include the Trustees/Directors, the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer. Information with respect to the Trustees'/Directors' fees is included in notes 11(b) and 12(b). The compensation paid or payable to the Trust's key management personnel was as follows:

Years ended December 31,	2017		2016
Salaries, incentives and short-term benefits	$	3,051	$	2,645
Unit-based compensation expense including fair value adjustments	2,371		761
	$	5,422	$	3,406

Related party transactions for the year ended December 31, 2017 also included a $0.7 million reimbursement of proxy contest expenses to a company affiliated with a director/trustee of Granite in connection with the 2017 annual general meeting (note 12(c)).

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19.  COMBINED FINANCIAL INFORMATION

The combined financial statements include the financial position and results of operations and cash flows of each of Granite REIT and Granite GP. Below is a summary of the financial information for each entity along with the elimination entries and other adjustments that aggregate to the combined financial statements:

Balance Sheet	As at December 31, 2017
	Granite REIT			Granite GP		Eliminations/ Adjustments			Granite REIT and Granite GP Combined
ASSETS	​			​		​		​	​
Non-current assets:	​			​		​		​	​
Investment properties		$	2,733,568	​		​		​		$	2,733,568
Investment in Granite LP	​	—		​	12	​	(12	)	​	—
Other non-current assets	​	7,359		​		​		​	​	7,359
	​	2,740,927		​	12	​	(12	)	​	2,740,927
Current assets:	​			​		​		​	​
Assets held for sale	​	391,453		​		​		​	​	391,453
Other current assets	​	4,988		​	46	​		​	​	5,034
Intercompany receivable(1)	​	—		​	6,331	​	(6,331	)	​	—
Cash and cash equivalents	​	68,572		​	447	​		​	​	69,019
Total assets		$	3,205,940	​	6,836	​	(6,343	)		$	3,206,433
LIABILITIES AND EQUITY	​			​		​		​	​
Non-current liabilities:	​			​		​		​	​
Unsecured debentures, net		$	647,306	​		​		​		$	647,306
Other non-current liabilities	​	305,518		​		​		​	​	305,518
	​	952,824		​		​		​	​	952,824
Current liabilities:	​			​		​		​	​
Bank indebtedness	​	32,552		​		​		​	​	32,552
Intercompany payable(1)	​	6,331		​		​	(6,331	)	​	—
Other current liabilities	​	76,371		​	6,824	​		​	​	83,195
Total liabilities	​	1,068,078		​	6,824	​	(6,331	)	​	1,068,571
Equity:	​			​		​		​	​
Stapled unitholders' equity	​	2,136,602		​	12	​		​	​	2,136,614
Non-controlling interests	​	1,260		​		​	(12	)	​	1,248
Total liabilities and equity		$	3,205,940	​	6,836	​	(6,343	)		$	3,206,433

⁽¹⁾

Represents employee and trustee/director compensation related amounts which will be reimbursed by Granite LP.

​94      Granite REIT 2017

Granite REIT Annual Report 2017

Balance Sheet	As at December 31, 2016
	Granite REIT			Granite GP		Eliminations/ Adjustments			Granite REIT and Granite GP Combined
ASSETS	​			​		​		​	​
Non-current assets:	​			​		​		​	​
Investment properties	​	$	2,653,095	​		​		​	​	$	2,653,095
Investment in Granite LP	​	—		​	8	​	(8	)	​	—
Other non-current assets	​	7,888		​		​		​	​	7,888
	​	2,660,983		​	8	​	(8	)	​	2,660,983
Current assets:	​			​		​		​	​
Other current assets	​	4,392		​	52	​		​	​	4,444
Intercompany receivable(1)	​	—		​	8,029	​	(8,029	)	​	—
Cash and cash equivalents	​	246,182		​	33	​		​	​	246,215
Total assets		$	2,911,557	​	8,122	​	(8,037	)		$	2,911,642
LIABILITIES AND EQUITY	​			​		​		​	​
Non-current liabilities:	​			​		​		​	​
Unsecured debentures, net	​	$	646,768	​		​		​	​	$	646,768
Other non-current liabilities	​	256,669		​		​		​	​	256,669
	​	903,437		​		​		​	​	903,437
Current liabilities:	​			​		​		​	​
Intercompany payable(1)	​	8,029		​		​	(8,029	)	​	—
Other current liabilities	​	50,355		​	8,114	​		​	​	58,469
Total liabilities	​	961,821		​	8,114	​	(8,029	)	​	961,906
Equity:	​			​		​		​	​
Stapled unitholders' equity	​	1,948,199		​	8	​		​	​	1,948,207
Non-controlling interests	​	1,537		​		​	(8	)	​	1,529
Total liabilities and equity		$	2,911,557	​	8,122	​	(8,037	)		$	2,911,642

⁽¹⁾

Represents employee and trustee/director compensation related amounts which will be reimbursed by Granite LP.

​Granite REIT 2017        95

Granite REIT Annual Report 2017

Income Statement	Year ended December 31, 2017
	Granite REIT				Granite GP			Eliminations/ Adjustments			Granite REIT and Granite GP Combined
Revenue		$	222,638	​	​		​	​		​		$	222,638	​
General and administrative expenses	​	26,066		​	​		​	​		​	​	26,066		​
Proxy contest expenses	​	5,866		​	​		​	​		​	​	5,866		​
Interest expense and other financing costs, net	​	19,471		​	​		​	​		​	​	19,471		​
Other costs and expenses, net	​	10,207		​	​		​	​		​	​	10,207		​
Share of (income) loss of Granite LP	​	—		​	​	(4	)	​	4	​	​	—		​
Fair value gains on investment properties, net	​	(212,106		)	​		​	​		​	​	(212,106		)
Fair value losses on financial instruments	​	823		​	​		​	​		​	​	823		​
Acquisition transaction costs	​	718		​	​		​	​		​	​	718		​
Loss on sale of investment properties	​	427		​	​		​	​		​	​	427		​
Income before income taxes	​	371,166		​	​	4	​	​	(4	)	​	371,166		​
Income tax expense	​	13,418		​	​		​	​		​	​	13,418		​
Net income	​	357,748		​	​	4	​	​	(4	)	​	357,748		​
Less net income attributable to non-controlling interests	​	50		​	​		​	​	(4	)	​	46		​
Net income attributable to stapled unitholders		$	357,698	​	​	4	​	​	—	​		$	357,702	​

Income Statement	Year ended December 31, 2016
	Granite REIT				Granite GP			Eliminations/ Adjustments			Granite REIT and Granite GP Combined
Revenue	​	$	223,401	​	​		​	​		​	​	$	223,401	​
General and administrative expenses	​	27,960		​	​		​	​		​	​	27,960		​
Interest expense and other financing costs, net	​	19,587		​	​		​	​		​	​	19,587		​
Early redemption costs of unsecured debentures	​	11,920		​	​		​	​		​	​	11,920		​
Other costs and expenses, net	​	7,971		​	​		​	​		​	​	7,971		​
Share of (income) loss of Granite LP	​	—		​	​	(3	)	​	3	​	​	—		​
Fair value gains on investment properties, net	​	(175,924		)	​		​	​		​	​	(175,924		)
Fair value losses on financial instruments	​	1,150		​	​		​	​		​	​	1,150		​
Loss on sale of investment properties	​	2,420		​	​		​	​		​	​	2,420		​
Income before income taxes	​	328,317		​	​	3	​	​	(3	)	​	328,317		​
Income tax expense	​	47,625		​	​		​	​		​	​	47,625		​
Net income	​	280,692		​	​	3	​	​	(3	)	​	280,692		​
Less net income attributable to non-controlling interests	​	1,370		​	​		​	​	(3	)	​	1,367		​
Net income attributable to stapled unitholders		$	279,322	​	​	3	​	​	—	​		$	279,325	​

​96      Granite REIT 2017

Granite REIT Annual Report 2017

Statement of Cash Flows	Year ended December 31, 2017
	Granite REIT				Granite GP			Eliminations/ Adjustments			Granite REIT and Granite GP Combined
OPERATING ACTIVITIES	​			​	​		​	​		​	​			​
Net income		$	357,748	​	​	4	​	​	(4	)		$	357,748	​
Items not involving current cash flows	​	(192,530		)	​	(4	)	​	4	​	​	(192,530		)
Changes in working capital balances	​	(8,011		)	​	414	​	​		​	​	(7,597		)
Other operating activities	​	1,056		​	​		​	​		​	​	1,056		​
Cash provided by operating activities	​	158,263		​	​	414	​	​	—	​	​	158,677		​
INVESTING ACTIVITIES	​			​	​		​	​		​	​			​
Business acquisition	​	(153,979		)	​		​	​		​	​	(153,979		)
Investment property capital additions	​			​	​		​	​		​	​			​
— Maintenance or improvements	​	(10,736		)	​		​	​		​	​	(10,736		)
— Developments or expansions	​	(72,404		)	​		​	​		​	​	(72,404		)
Other investing activities	​	(728		)	​		​	​		​	​	(728		)
Cash used in investing activities	​	(237,847		)	​	—	​	​	—	​	​	(237,847		)
FINANCING ACTIVITIES	​			​	​		​	​		​	​			​
Distributions paid	​	(122,637		)	​		​	​		​	​	(122,637		)
Other financing activities	​	17,399		​	​		​	​		​	​	17,399		​
Cash used in financing activities	​	(105,238		)	​	—	​	​	—	​	​	(105,238		)
Effect of exchange rate changes	​	7,212		​	​		​	​		​	​	7,212		​
Net increase (decrease) in cash and cash equivalents during the year		$	(177,610	)	​	414	​	​	—	​		$	(177,196	)

Statement of Cash Flows	Year ended December 31, 2016
	Granite REIT				Granite GP			Eliminations/ Adjustments			Granite REIT and Granite GP Combined
OPERATING ACTIVITIES	​			​	​		​	​		​	​			​
Net income	​	$	280,692	​	​	3	​	​	(3	)	​	$	280,692	​
Items not involving current cash flows	​	(121,864		)	​	(3	)	​	3	​	​	(121,864		)
Changes in working capital balances	​	81		​	​	(122	)	​	—	​	​	(41		)
Other operating activities	​	1,204		​	​		​	​		​	​	1,204		​
Cash provided by (used in) operating activities	​	160,113		​	​	(122	)	​	—	​	​	159,991		​
INVESTING ACTIVITIES	​			​	​		​	​		​	​			​
Investment property capital additions	​			​	​		​	​		​	​			​
— Maintenance or improvements	​	(2,063		)	​		​	​		​	​	(2,063		)
— Developments or expansions	​	(17,221		)	​		​	​		​	​	(17,221		)
Other investing activities	​	31,063		​	​		​	​		​	​	31,063		​
Cash provided by investing activities	​	11,779		​	​	—	​	​	—	​	​	11,779		​
FINANCING ACTIVITIES	​			​	​		​	​		​	​			​
Distributions paid	​	(113,095		)	​		​	​		​	​	(113,095		)
Other financing activities	​	73,134		​	​		​	​		​	​	73,134		​
Cash used in financing activities	​	(39,961		)	​	—	​	​	—	​	​	(39,961		)
Effect of exchange rate changes	​	(4,749		)	​		​	​		​	​	(4,749		)
Net increase (decrease) in cash and cash equivalents during the year		$	127,182	​	​	(122	)	​	—	​		$	127,060	​

​Granite REIT 2017        97

Granite REIT Annual Report 2017

20.  COMMITMENTS AND CONTINGENCIES

(a)

The Trust is subject to various legal proceedings and claims that arise in the ordinary course of business. Management believes that the final outcome of such matters will not have a material adverse effect on the financial position, results of operations or liquidity of the Trust. However, actual outcomes may differ from management's expectations.

(b)

At December 31, 2017, the Trust's contractual commitments related to construction and development projects amounted to approximately $7.9 million of which $6.4 million will be reimbursed from a tenant.

(c)

At December 31, 2017, the Trust had commitments on non-cancellable operating leases requiring future minimum annual rental payments as follows:

Not later than 1 year	$	453
Later than 1 year and not later than 5 years	1,105
Later than 5 years	—
	$	1,558

In addition, the Trust is committed to making annual payments under two ground leases for the land upon which two income-producing properties are situated of $0.5 million and $0.1 million to the years 2049 and 2096, respectively. As at December 31, 2017, the fair value of the investment properties situated on the land under ground leases is $53.8 million.

21.  SUBSEQUENT EVENTS

(a)

In January 2018, the Trust sold 10 properties, classified as assets held for sale at December 31, 2017, for gross proceeds of approximately $391.4 million (note 5).

(b)

On February 2, 2018, the Trust paid its tenant allowance obligation of $9.0 million (€6.0 million) (note 7).

(c)

On February 1, 2018, the Trust entered into a new five-year unsecured credit facility in the amount of $500.0 million that matures on February 1, 2023 (note 8).

(d)

Subsequent to December 31, 2017, the Trust declared distributions in January and February 2018 of $10.6 million and $10.5 million, respectively (note 10).

(e)

Subsequent to year end and as of March 1, 2018, the Trust purchased 891,440 stapled units for total consideration of $43.9 million pursuant to the NCIB (note 11(c)).

​98      Granite REIT 2017

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