they reached (what )they thought was the place they had been dreaming of.
首先 后面the place they had been dreaming of 定语从句,从句先不看
其次 they thought 做插入语,先不看
抽丝剥茧,剩下的就是what was the place做reach的宾语从句
而在从句中 what是做主语的,所以只能用what,where是不能做从句主语的