Kindred Healthcare Announces First Quarter Results and Agreements with Ventas, Inc.

Kindred Healthcare, Inc. (“Kindred”) (NYSE:KND) today announced its operating results for the first quarter ended March 31, 2007.

Kindred also announced that it has entered into agreements with Ventas, Inc. (“Ventas”) (NYSE:VTR). Under the terms of the agreements, Kindred will purchase for resale 22 under-performing facilities (the “Facility Acquisitions”) currently leased from Ventas. In connection with these agreements, Kindred has renewed the leases for all of the remaining facilities that were scheduled to expire in April 2008. In addition, Kindred and Ventas have amended and restated the master lease agreements between the parties (the “Amended Master Leases”) to reflect several amendments. Ventas also has agreed that it will not contest Kindred’s proposed spin-off of its pharmacy division. The Facility Acquisitions are expected to close by June 30, 2007.

Kindred also announced that it will host an investor conference call to be held today at 11:00 a.m. (Eastern Time) to discuss both its first quarter results and the Ventas agreements.

First Quarter Results

Continuing Operations

Revenues for the first quarter of 2007 rose 11% to $1.1 billion compared to $1.0 billion in the year-earlier period. Net income from continuing operations totaled $15.7 million or $0.39 per diluted share in the first quarter of 2007 compared to $21.9 million or $0.53 per diluted share in the first quarter last year.

Operating results for the first quarter of 2007 included a pretax charge of $4.1 million ($2.5 million net of income taxes or $0.06 per diluted share) for professional fees and other costs incurred in connection with the proposed spin-off of Kindred’s institutional pharmacy business.

Operating results for the first quarter of 2006 included certain items that, in the aggregate, decreased net income by approximately $0.5 million or $0.01 per diluted share.

Discontinued Operations

In the first quarter of 2007, Kindred reported a net loss from discontinued operations totaling $0.6 million or $0.01 per diluted share compared to net income of $1.9 million or $0.05 per diluted share in the first quarter of 2006. Operating results for discontinued operations in the first quarter of 2006 included a favorable pretax adjustment of $7.0 million ($4.3 million net of income taxes or $0.11 per diluted share) resulting from a change in estimate for professional liability reserves related primarily to Kindred’s Florida and Texas nursing centers that were divested in prior years.

Kindred also reported a $7.8 million net loss related to the divestiture transaction with Health Care Property Investors, Inc. (NYSE:HCP) that was completed in the first quarter of 2007.

Other Quarterly Information

During the first quarter of 2007, Kindred received a distribution of approximately $37 million from its limited purpose insurance subsidiary to be used for general corporate purposes. The distribution resulted from the insurance subsidiary’s improved professional liability underwriting results. These funds were used to repay borrowings under Kindred’s revolving credit facility.

Agreements with Ventas

Facility Acquisitions

Kindred and Ventas have entered into definitive agreements under which Kindred will acquire 21 nursing centers and one long-term acute care hospital (collectively, the “Facilities”) for $171.5 million. In addition, Kindred will pay a lease termination fee of $3.5 million. The current annual rents for the Facilities are approximately $10.3 million.

The Facilities, which contain 2,634 licensed nursing center beds and 220 licensed hospital beds, generated pretax losses of approximately $10 million for the year ended December 31, 2006. Upon closing, Kindred will account for the operations of the Facilities as discontinued operations.

Kindred intends to complete the divestiture of all of the Facilities by December 31, 2007. Kindred expects to generate between $80 million and $90 million in proceeds from the sale of the Facilities and the related operations. Kindred expects to record a net loss of approximately $60 million to $70 million in the second quarter of 2007 relating to these divestitures.

Renewal of Leases Scheduled to Expire in 2008

In connection with the Facility Acquisitions, Kindred has renewed the leases for an additional five years for 49 nursing centers (approximately 5,844 licensed beds) and eight long-term acute care hospitals (approximately 635 licensed beds) (collectively, the “Renewal Facilities”). Kindred’s option to renew the leases on the Renewal Facilities would have expired on April 29, 2007. The initial lease term for the Renewal Facilities was scheduled to expire in April 2008. The existing rents and the annual escalators are not affected by the renewals.

Master Lease Amendments

In connection with the Facility Acquisitions, Kindred and Ventas entered into the Amended Master Leases, which became effective immediately. The Amended Master Leases include, among other things, the following amendments:

• Kindred has an ongoing right to de-license 35% of the hospital beds in any hospital and 10% of the hospital beds in any Amended Master Lease for the conversion of excess hospital capacity into licensed skilled nursing sub-acute units.
• Kindred is permitted to de-license 912 beds in 70 nursing centers, which will allow Kindred to reduce multiple bed wards and enhance the quality of life for its residents and improve the marketability of these facilities to Medicare, managed care and private pay patients and residents.
• Insurance provisions have been modified (a) to expand the list of third-party insurers that are permitted to insure Kindred’s professional liability exposure and (b) to provide a one-time right for Kindred to commute certain insurance policies.
• Two lease renewal bundles contained in the Amended Master Lease No. 3 have been combined.
• Ventas has enhanced reporting and inspection rights.

Ventas Consents to Pharmacy Transaction

In connection with these agreements, Ventas has agreed not to contest the proposed spin-off of Kindred’s KPS institutional pharmacy division and the subsequent merger of KPS with the institutional pharmacy services business of AmerisourceBergen Corporation (“AmerisourceBergen”) (NYSE:ABC).

Conditions to Closing

The Facility Acquisitions are subject to certain approvals and other customary conditions to closing.

Management Commentary

Paul J. Diaz, President and Chief Executive Officer of Kindred, remarked, “We reported another good quarter, with each of our operating divisions performing in line with our expectations. Our hospital operating income was bolstered by 14% growth in same-store non-government admissions. Our health services division reported another quarter of growth in revenues and operating income driven primarily by higher census levels and improved payor mix. Peoplefirst rehabilitation services reported higher revenues and operating income as we grew our external customer base and improved the overall productivity of our therapists compared to the first quarter last year. Our KPS institutional pharmacy business rebounded nicely from a difficult fourth quarter in 2006 as we made progress in our acquired pharmacies and other execution issues under Medicare Part D.”

With respect to the Ventas agreements, Mr. Diaz remarked, “We believe the transactions with Ventas provide a number of benefits to Kindred. The Facilities being acquired for resale are poor performers and give us an opportunity to improve our financial results and focus more management time and resources on our more productive operations and our cluster market strategic growth opportunities.”

“The Amended Master Leases also will provide additional flexibility to improve our operations. The ability to convert existing capacity in our long-term acute care hospitals into productive sub-acute units will create new growth opportunities in markets that need these services. De-licensing beds in a significant number of our nursing centers that have three and four bed wards will enhance the quality of life for our residents, improve clinical outcomes and help us continue to improve our payor mix, especially with respect to short stay managed care and Medicare patients. The insurance modifications also give us an opportunity to further monetize some of the benefits we have achieved from improving the quality of our services and our risk management efforts.”

Mr. Diaz commented further, “While many of the benefits associated with the Ventas agreements will not be realized until 2008 and beyond, we believe that these transactions will be slightly accretive to earnings in the second half of this year. Investors should note that our view of the 2007 impact of the Ventas transactions includes the assumption that the proceeds from the sale of the Facilities will not be realized until the fourth quarter of 2007.”

With respect to Kindred’s ongoing development activities, Mr. Diaz noted, “During the first quarter, we added eight high quality nursing centers in the San Francisco/Oakland marketplace. We also completed the divestiture of ten under-performing nursing centers during the quarter through a previously announced transaction. These transactions, together with the Ventas agreements announced today, are part of our continuing efforts to improve our operations and position Kindred for growth in our targeted cluster markets.”

Mr. Diaz also commented on Kindred’s planned spin-off of its KPS institutional pharmacy business. “We are making solid progress in combining our KPS business with the long-term care pharmacy business of AmerisourceBergen to form the new PharMerica, which will be the second largest provider in the industry. We are excited about the opportunities this transaction will bring to our customers, employees and shareholders and we expect that this transaction will be consummated in the second quarter of 2007.”

Earnings Guidance for 2007 Maintained

Kindred maintained its 2007 earnings guidance for continuing operations. Kindred expects consolidated revenues for 2007 to approximate $4.5 billion. Operating income, or earnings before interest, income taxes, depreciation, amortization, and rents, is expected to range from $580 million to $587 million. Rent expense is expected to approximate $347 million, while depreciation, amortization and net interest expense are expected to approximate $127 million. Net income from continuing operations for 2007 is expected to approximate $60 million to $64 million or $1.50 to $1.60 per diluted share (based upon diluted shares of 40 million).

Kindred indicated that the guidance includes the operations of its KPS institutional pharmacy business for the full year but does not include any costs associated with the consummation of the proposed spin-off transaction. Kindred’s 2007 earnings guidance also includes the estimated impact of the previously discussed transactions with Ventas. In addition, Kindred’s 2007 earnings guidance also includes the estimated impact of the proposed rules issued by the Centers for Medicare and Medicaid Services on January 25, 2007 related to long-term acute care hospitals. Kindred believes that these proposed rules, if adopted, could reduce Medicare reimbursement to its hospitals by approximately $20 million in the second half of 2007 (including the impact of a lower than expected market basket increase). The guidance does not include any other significant changes in reimbursement and does not take into account the effects of any other material acquisitions or divestitures.

While Kindred does not provide quarterly earnings guidance, management believes that investors should consider the seasonality of Kindred’s quarterly earnings, particularly the weakness in hospital admissions during the third quarter coupled with a negative proposed Medicare rule change that would take effect on July 1, 2007.

Mr. Diaz noted, “Our first quarter results were consistent with our expectations for the full year. We look forward to continued progress in each of our operating divisions as we focus on the execution of our strategic plan. As in the past, high satisfaction levels from our patients, customers, employees and physicians will continue to be the key drivers of our business success.”

Investor Conference Call Information

Kindred will provide an online, real-time webcast of its conference call covering this announcement today at 11:00 a.m. (Eastern Time). Kindred’s previously announced investor conference call originally scheduled for Tuesday, May 1, 2007 at 10:00 a.m. (Eastern Time) has been cancelled.

The live broadcast of Kindred’s quarterly conference call will be available online at www.earnings.com and at Kindred’s website, www.kindredhealthcare.com. The online replay will be available on the websites www.earnings.com and www.kindredhealthcare.com at approximately 1:00 p.m. (Eastern Time) and continue for 30 days.

Forward Looking Statements

This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements regarding Kindred’s expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures, competitive positions, growth opportunities, plans and objectives of management and statements containing the words such as “anticipate,”“approximate,” “believe,”“plan,” “estimate,”“expect,” “project,”“could,” “should,”“will,” “intend,”“may” and other similar expressions, are forward-looking statements.

Such forward-looking statements are inherently uncertain, and stockholders and other potential investors must recognize that actual results may differ materially from Kindred’s expectations as a result of a variety of factors, including, without limitation, those discussed below. Such forward-looking statements are based upon management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which Kindred is unable to predict or control, that may cause Kindred’s actual results or performance to differ materially from any future results or performance expressed or implied by such forward-looking statements. These statements involve risks, uncertainties and other factors discussed below and detailed from time to time in Kindred’s filings with the Securities and Exchange Commission.

In addition to the factors set forth above, other factors that may affect Kindred’s plans or results include, without limitation, (a) Kindred’s ability to operate pursuant to the terms of its debt obligations and its Amended Master Leases with Ventas; (b) Kindred’s ability to meet its rental and debt service obligations; (c) Kindred’s ability to complete the Facility Acquisitions with Ventas, including the satisfaction of all closing conditions, and its ability to complete the resale of the Facilities; (d) Kindred’s and AmerisourceBergen’s ability to complete the proposed merger of their respective institutional pharmacy operations, including the receipt of all required regulatory approvals and the satisfaction of other closing conditions to the proposed transaction; (e) adverse developments with respect to Kindred’s results of operations or liquidity; (f) Kindred’s ability to attract and retain key executives and other healthcare personnel; (g) increased operating costs due to shortages in qualified nurses, therapists and other healthcare personnel; (h) the effects of healthcare reform and government regulations, interpretation of regulations and changes in the nature and enforcement of regulations governing the healthcare industry; (i) changes in the reimbursement rates or methods of payment from third party payors, including the Medicare and Medicaid programs, changes arising from and related to the Medicare prospective payment system for long-term acute care hospitals, including potential changes to hospital Medicare payment rules, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, and changes in Medicare and Medicaid reimbursements for Kindred’s nursing centers; (j) national and regional economic conditions, including their effect on the availability and cost of labor, materials and other services; (k) Kindred’s ability to control costs, particularly labor and employee benefit costs; (l) Kindred’s ability to successfully pursue its development activities and successfully integrate new operations, including the realization of anticipated revenues, economies of scale, cost savings and productivity gains associated with such operations; (m) the increase in the costs of defending and insuring against alleged professional liability claims and Kindred’s ability to predict the estimated costs related to such claims; (n) Kindred’s ability to successfully reduce (by divestiture of operations or otherwise) its exposure to professional liability claims; (o) Kindred’s ability to successfully dispose of unprofitable facilities; and (p) Kindred’s ability to ensure and maintain an effective system of internal controls over financial reporting. Many of these factors are beyond Kindred’s control. Kindred cautions investors that any forward-looking statements made by Kindred are not guarantees of future performance. Kindred disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.

As noted above, Kindred’s earnings guidance includes the financial measure referred to as operating income. Kindred’s management uses operating income as a meaningful measure of operational performance in addition to other measures. Kindred uses operating income to assess the relative performance of its operating divisions as well as the employees that operate these businesses. In addition, Kindred believes this measurement is important because securities analysts and investors use this measurement to compare Kindred’s performance to other companies in the healthcare industry. Kindred believes that net income from continuing operations is the most comparable measure, in relation to generally accepted accounting principles, to operating income. Readers of Kindred’s financial information should consider net income from continuing operations as an important measure of Kindred’s financial performance because it provides the most complete measure of its performance. Operating income should be considered in addition to, not as a substitute for, or superior to, financial measures based upon generally accepted accounting principles as an indicator of operating performance. A reconciliation of the estimated operating income to net income from continuing operations provided in Kindred’s earnings guidance is included in this press release.

About Kindred Healthcare

Kindred Healthcare, Inc. (NYSE:KND) is a Fortune 500 healthcare services company, based in Louisville, Kentucky, with annualized revenues of $4.5 billion that provides services in approximately 600 locations in 38 states. Kindred through its subsidiaries operates long-term acute care hospitals, skilled nursing centers, institutional pharmacies and a contract rehabilitation services business, Peoplefirst Rehabilitation Services, across the United States. Kindred’s 56,000 employees are committed to providing high quality patient care and outstanding customer service to become the most trusted and respected provider of healthcare services in every community we serve. For more information, go to www.kindredhealthcare.com.