The producer - who, along with songwriting and producing partners Mike Stock and Matt Aitken, worked with the singer early in her pop career - admitted it was one of the strangest evenings he had.
He exclusively told BANG Showbiz: ''When we were in the Welsh valleys looking for her grandmother because her gran is Welsh. We were on tour and Kylie was desperate to find her grandmother's house.
''It was funny, we're on tour looking for this house. I was thinking, 'I'm not sure we should be doing this.' We did find it, if I remember right. She never knocked on the door, she just wanted to the house some of her roots. That was a bizarre evening.''
Stock, Aitken and Waterman - who have written and produced with some of the biggest acts in pop - first worked with Kylie in the late 1980, starting with her global hit 'I Should Be So Lucky'.
Now, the Australian hitmaker is supporting her new country album 'Golden', and Waterman, 71, is delighted to see her branching out.
He added: ''She's great, for me it's like watching my kids off in the world doing alright.''
The songwriting trio also worked with Rick Astley, and Waterman has enjoyed seeing him blossom over the past 30 years after first signing with the team.
He gushed: ''Rick has taken 50 years to find himself, and when he did, everyone was like, 'My god, he's amazing.' And I was like, 'I told you!'
''When he was 18 he was amazing. Rick's fantastic, he goes out and does a great show in which he sings his new songs and he sings the songs he did with Stock, Aitken and Waterman.
''He loves the audience, he jokes, he's not frightened to take the mickey out of himself and he's become an all round entertainer, which is fantastic. To me, he's one of the best singers that there's ever been. Rick Astley can sing whatever he wants to sing, he's bloody brilliant.''
And Waterman also shed some like on what made the artists they've worked with so special, and how they have developed as performers and musicians.
He explained: ''We [Stock, Aitken and Waterman] worked with people we wanted to work with and when you work with Donna Summer, or Bananarama, or Kylie, or Rick Astley, they all believe in what they're doing and it was a pleasure to work with them ... The guys that we taught are doing it for themselves.''
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